We came away from MPI’s 3Q19 Analysts’ Briefing maintaining our positive view on the company. Management expects the group to perform better sequentially in 4Q19 as strong demand was observed in the Apr-May period, although YoY earnings could be flattish. The potential eventual ban on a Chinese telco giant could benefit MPI’s Suzhou plant, as orders divert to locals. Management is confident of regaining its Shariah- compliant status in the upcoming November review. No changes to FY19-20E CNP of RM126-158m. Maintain OP with TP of RM12.10.

Expect better quarter sequentially. Management expects the group to perform better sequentially in 4Q19 (both top and bottom-lines), as strong demand was observed in the Apr-May period. This aligns with our view, as we learn from our channel checks that many Chinese manufacturers have been ramping up orders recently on fear of being restricted from purchasing US chips later. Additionally, the group has recently introduced several new products in the automotive (sensors used for electric cars) and server spaces, although some orders were pushed back due to market uncertainty. Management is hoping that the deferred orders will morph into bullet-orders later. On a YoY comparison, however, earnings could be flattish on potential slight drop in revenue.

Possible China expansion and M&A on solid balance sheet. The potential ban on a Chinese telecommunication (telco) behemoth by the US could divert semiconductor orders to Korean and local Chinese manufacturers, potentially benefitting MPI as the group operates a factory in Suzhou. In fact, we understand that some Chinese design houses have already engaged MPI, requesting the group to increase capacity significantly, although management is still assessing its economic feasibility. Currently, the Suzhou plant is already running at 93% utilisation. Given MPI’s strong balance sheet with net cash of RM689m as at end-3Q19, we do not discount the possibility of further expansion in China. This aside, MPI continues to be on the lookout for potential merger and acquisition opportunities, with the focus on material companies such as substrate manufacturers.

Confident in regaining Shariah status. The group has taken the necessary steps to comply with the Shariah screening criteria and is hopeful of regaining its Shariah-compliant status upon the next review period in November 2019.

No changes in FY19-20E CNP of RM126-158m as management’s updates were in line with our view.

Maintain OUTPERFORM with an unchanged Target Price of RM12.10 based on FY20E PER of 13.0x (rolled forward from FY19E), reflecting the group’s mid-cycle valuation. Despite the lackluster outlook for the near term, we still like MPI for its long-term objective to transform its portfolio into an automotive-centric one, a space which offers brighter growth prospects due to rising semiconductor content in automobiles. In addition, the stock is currently a deep bargain with ex- cash PER of 6.4x after considering its net cash position of RM689m as of 3Q19.

Risks to our call are: (i) weaker-than-expected sales and margins, and (ii) unfavourable currency exchange rates.

Source: Kenanga Research - 28 May 2019