MPI’s 4Q19 CNP came in within expectations at RM30.1m (- 23% YoY; +79% QoQ), bringing FY19 CNP to RM128m (-10% YoY), forming 96% of consensus estimate and 102% of ours. The group’s net cash position further strengthened to RM713m from RM689m in 3Q19. No dividend was declared during the quarter, as usual. Fine-tune FY20E CNP by 1% to RM161m due to housekeeping reasons and we introduce FY21E CNP of RM168m. Maintain OUTPERFORM with a TP of RM12.10.

Within expectations. Malaysian Pacific Industries (MPI)’s 4Q19 core net profit (CNP) came in within expectations at RM30.1m (-23% YoY; +79% QoQ), bringing FY19 CNP to RM128m (-10% YoY). The full-year CNP made up 96% of consensus estimate and 102% of ours. The group’s net cash position further strengthened to RM713m from RM689m in 3Q19. No dividend was declared during the quarter, as usual.

YoY, FY19 CNP fell 10% on a 4% revenue dip, led by the US with a 20% decline amid the trade war, but largely offset by 2% growth from Asia. Meanwhile, the quicker pace of decline in CNP is explained by RM17m FX loss (vs. RM15M FX gain in FY18) and higher contribution from the group’s 70%-owned subsidiary Carsem (M) Sdn Bhd, which resulted in higher minority interest. QoQ, CNP soared 79% as revenue climbed 5%. While we have yet to obtain a detailed industry breakdown, we believe the revenue growth was underpinned by higher smartphone sales from several new model launches towards end- 3Q19, which likely boosted the demand for the group’s Quad Flat No leads (QFN) packages and at the same time, Dynacraft’s lead frames. The larger increase at the bottom-line is explained by a notable 4ppt expansion in GPM to 16%, likely due to higher capacity utilisation.

A better portfolio to fuel growth. The group has embarked on a portfolio rationalisation exercise that entails weeding out low-margin products while switching focus to automotive sensors, including MEMS and packages used in data servers such as Cu-clip packages for power management chips. The said segments are likely to offer decent growth prospects given rising semiconductor content in automobiles and increasing data needs. In addition, the automotive space is likely to offer higher margins as cars are bigger ticket items, and the segment has a higher barrier to entry due to long and strict qualification processes.

Fine-tune FY20E CNP by 1% to RM161m due to housekeeping reasons and we introduce FY21E CNP of RM168m.

Maintain OUTPERFORM with an unchanged Target Price of RM12.10 based on CY20E PER of 14x, reflecting the group’s mid-cycle valuation. We still like MPI for its long-term mission 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 5.6x after considering its net cash position of RM713m as of 4Q19.

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

Source: Kenanga Research - 29 Aug 2019