MPI’s 1QFY20 CNP came in within expectations at RM36.8m (- 13% YoY; +24% QoQ), forming 22% of our, and 25% of consensus, estimate. The group’s net cash position further strengthened to RM760m from RM713m in 4QFY19. The group declared 10.0 sen dividend per share which is in line with our expectation. We keep our FY20E CNP of RM161m. Maintain OUTPERFORM with a TP of RM12.10.

Within expectations. Malaysian Pacific Industries (MPI)’s 1QFY20 core net profit (CNP) came in within expectations at RM36.8m (-13% YoY; +24% QoQ), accounting for 22% of our forecast and 25% of consensus estimate. The group’s net cash position further strengthened to RM760m from RM713min 4QFY19. It declared 10.0 sen dividend per share which is in line with our expectation.

YoY, 1QFY20 CNP fell 13% on an 11% revenue dip, led by the US market with a 23.8% decline amid the US-China trade war. Revenue from the Asian and European markets also fell, but at a smaller quantum of 8% and 8.4% respectively. Meanwhile, the RM1.35m FX loss in 1QFY20 (vs. RM2.7m FX gain in 1QFY19) resulted in a quicker pace of CNP decline. QoQ, CNP jumped 24% as revenue climbed

6.7%. We believe the revenue growth was underpinned by improved smart-phone sales from several new model launches in September 2019, which likely translated into higher demand for MPI’s Quad Flat No-leads (QFN) packages. In addition, the 8.7% YoY growth in European car sale for the month of Oct also contributed positively. The group saw a 1.3ppt expansion in CNP margin to 10%, thanks to higher margin jobs and better cost control.

Automotive will remain the key focus. The group has switched its focus to automotive sensors, including MEMS and packages used in data servers such as Cu-clip packages for power management chips. These items are likely to offer decent growth prospects given rising semiconductor content in automobiles and increasing data needs. In addition, the automotive segment 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. While the group has completed a large round of portfolio rationalisation (which entails weeding out low-margin customers) in the past few quarters, it will still be practicing the same approach going forward to maintain its CNP margin at double digits.

We keep our FY20E CNP at RM161m as we anticipate the recovery to continue in the subsequent quarters.

Maintain OUTPERFORM with an unchanged Target Price of RM12.10 based on CY20E PER of14x, 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 bright growth prospects due to rising semiconductor content in automobiles.

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

Source: Kenanga Research - 27 Nov 2019