MPI’s 2QFY20 CNP came in within expectations at RM45.1m (+15% YoY; +23% QoQ), bringing 1HFY20 CNP to RM81.9m (+0.5% YoY). This represents 51% of our, and 54% of consensus, estimate. The group’s net cash position further strengthened to RM797m from RM760m in the previous quarter. As expected, the group did not declare any dividend this quarter which leaves the YTD dividend at 10.0 sen. We keep our FY20E CNP of RM161m. Maintain OUTPERFORM with TP of RM14.00.

Within expectations. Malaysian Pacific Industries (MPI)’s 2QFY20 core net profit (CNP) came in within expectations at RM45.1m (+15% YoY; +23% QoQ), bringing 1HFY20 CNP to RM81.9m (+0.5% YoY). This represents 51% of our, and 54% of consensus, estimate. The group’s net cash position further strengthened to RM797m from RM760m in the previous quarter. As expected, the group did not declare any dividend this quarter which leaves the YTD dividend at 10. sen.

YoY, 1HFY20 CNP inched 0.5% higher even with a 3.6% dip in revenue to RM783m. This was possible thanks to the company’s goal to focus on lucrative products rather than volume alone. As such, net profit margin inched 0.5ppt to 10.5%. QoQ, CNP jumped 23% to RM45m as revenue climbed 12%. Revenue rose across all regions, with Asia (+13.8%) and Europe (+12.6%) logging double-digit gains. USA on the other hand grew at a modest pace of 4.5%. We believe the revenue growth was underpinned by the rebound in Europe car sales during the last few months of 2019, which translated into higher demand for sensor packaging. Note that Europe’s car sale in the month of December rose 21% YoY, turning the entire 2019 around to record a growth of 1.2%.

Automotive will remain the key focus. The group will continue to focus to automotive sensors, including MEMS and packages used in data servers such as Cu-clip packages for power management chips. Furthermore, its foray into silicon carbide power modules offers promising prospects given the increasing popularity among EV manufacturer. Silicon carbide offers longer driving range and faster charging times for the same battery capacity compared with common silicon. In addition, the automotive segment is likely to offer better margins as cars are bigger ticket items, and the segment has a higher barrier to entry due to long and strict qualification processes.

We keep our FY20E CNP unchanged at RM161m as we anticipate earnings to be on track to meet our forecast, supported by the recovery of the automotive market and increasing demand for radio frequency chips in tandem with the adoption of 5G in smartphones.

Maintain OUTPERFORM with an unchanged Target Price of RM14.00 based on CY20E PER of 16x, representing +1.5SD from its 5- year mean. 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, (ii) unfavourable currency exchange rates, and (iii) further disruption from the US-China trade war

Source: Kenanga Research - 27 Feb 2020