We came away from MPI’s 2QFY20 Analysts’ Briefing learning that the company’s pipeline is still intact and utilisation rate has resumed to peak levels. Bottom-line for the subsequent quarter is expected to be lower QoQ on seasonality while YoY should be flat to marginal growth. Its Suzhou plant continues to benefit from the long-standing trade war, as orders are being diverted to locals. Trimmed FY20E CNP by 14% to RM138m to factor in higher overtime wages. Maintain OP with a lower TP of RM13.30, representing 21% upside.

3Q to be flat YoY. We expect lower bottom-line on a QoQ basis but the numbers should hold on a YoY basis. 3Q has always been seasonally weaker for the group given the nature of its products. Management reiterated that its pipeline is full and there is no cancellation of orders due to the Covid-19 outbreak. If there are any delays in raw material supply, conversion could be back-loaded.

Worth noting that MPI’s Suzhou plant was the only OSAT in the area that was running during the extended Chinese New Year break, while its peers were closed for weeks. During mid-January, before the Covid- 19 outbreak was confirmed, management took early precaution to quarantine 52% of its workforce in the factory in order to keep production running (2 shifts per day). Operators were provided with lodging, food and face mask in the plant itself. As such, revenue for 3Q should see strong YoY growth but will be offset by higher overtime wages.

Expansion in China still on track. Workforce in the Suzhou plant has resumed to healthy levels and is currently running at 104% utilisation rate. The group has planned to build a second floor it its existing plant which could potentially double the capacity. Barring any further hiccups, the construction is estimated to be completed by July 2020. This is to cater for more jobs from Huawei which is heavily loading up on local suppliers in order to reduce its reliance on US vendors.

Silicon carbide to drive automotive segment. The newly acquired US customer has set up its first line of equipment in MPI’s Ipoh plant for the packaging of silicon carbide (SiC) power modules. SiC power modules are gaining rapid adoption in electric vehicles (EV), as it promises faster charging speed and longer driving range for the same amount of battery capacity compared to normal silicon. We reckon that the end customer is likely to be Tesla given than Tesla has been increasing demand for SiC power modules while the US customer has set aside US$1bil to increase production by 30x to meet market demand.

Robust balance sheet. With net cash of RM797m as at end-2QFY20, we are confident that the group will have no issue funding the expansion in Suzhou, with sufficient financial clout left for potential merger and acquisition opportunities.

Trimmed FY20E CNP by 14% to RM138m to account for higher operating cost in its Suzhou plant during the extended Chinese New Year break.

Maintain OUTPERFORM with a higher Target Price of RM13.30 (previously RM14.00) based on higher CY20E PER of 16x, representing +1.5SD from its 5-year mean. Our higher PER is justified by the group’s 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.

Source: Kenanga Research - 28 Feb 2020