We anticipate another solid quarter for 3QFY21, and even better subsequently on the back of stronger demand for: (i) copper clip-related packages used in automotive, (ii) power management packages for data centre expansions, and (iii) RF packaging for 5G base stations roll outs. MPI does not face chip shortage issues and is confident of sustaining its margins despite rising commodity prices, thanks to improved efficiencies. Expansions in Suzhou and Ipoh are in the pipeline to accommodate higher order volume from customers. Reiterate OUTPERFORM with a higher TP of RM47.00

Amazing earnings in the making. Despite seasonality impact from the Chinese New Year holidays in Feb, the group is on track to record yet another solid quarterly earnings for 3QFY21 (FYE June). The strong momentum is expected to continue into subsequent quarters, driven by stronger demand for copper clip-related packages used in automotive. Packaging demand for base station radio frequency (RF) components remains elevated as governments in many countries continue to push for better 5G infrastructure availability.

Riding the data centre boom. Demand for power chip packaging continues to surge on the back of data centre expansion and increased demand for consumer end-point devices as a result of expanded web computing activities (i.e. video conferencing, e-learning). To a certain extent, the massive surge in cryptocurrency prices has also contributed to the expansion and MPI’s power packages are largely preferred due to their efficiency which is critical for power hungry mining activities.

No chip shortage issue. In addition to being well prepared and avoiding lockdowns throughout the entire pandemic, the group has also been well prepared in managing its supplies. As a result, MPI is not impacted by the chip shortage issue and has sufficient supply for the year. The group is sanguine to sustain its margins despite rising commodity prices, thanks to its commitment to constantly improve internal efficiencies.

Expansion again. Hot on the heels of the recent expansion (50k sq ft) of its Suzhou plant in Oct 2020, another 50k sq ft expansion will commence by end-Apr to take on more orders from Chinese customers. This will increase Suzhou floor space to a total of 700k sq ft. The group is also looking for a new plant in China in anticipation of rising demand as a result of the “Made in China 2025” policy. Expansion for Ipoh plants is also in the pipeline as utilisation rates for all sites are >90%.

Raise FY21E and FY22E earnings by 9% and 11% to RM239.6m and RM271.1m to reflect higher order demand from key customers.

Maintain OUTPERFORM with a higher Target Price of RM47.00 (from RM43.00) based on 35x CY21E PER, +2SD to 3-year mean.

Risks to our call are: (i) weaker sales, (ii) unfavourable currency exchange rates, and (iii) disruption from the US-China trade war.

Source: Kenanga Research - 23 Apr 2021