MPI’s 1HFY23 results disappointed. 1HFY23 revenue fell 8.6% but net profit plummeted 57.5% resulting from unabsorbed cost due to suboptimal plant utilisation, especially in China. A weaker USD exacerbated the situation, leading to RM20.8m in foreign exchange losses. In light of the above, we cut our FY23-24F net profit by 34-14%, reduce our TP by 20% to RM20.00 (previously RM25.00) and downgrade our call to UNDERPERFORM from MARKET PERFORM.

Below expectations. 1HFY23 core net profit of RM71.0m (-57.5% YoY) missed expectations at only 30% and 29% of our full-year forecast and the full-year consensus estimates, respectively. The variance against our forecast came mainly from a lower utilisation rate coupled with foreign exchange losses.

Results’ highlight. YoY, 1HFY23 revenue dropped 8.6% as better sales from USA (2.5%) and Europe (24.4%) were offset by weaker sales in Asia (-21.8%) which constitutes 55% of the group’s revenue. However, the bottom line was exacerbated by unabsorbed overhead during the reporting period as well as the weakening USD which resulted in RM20.8m foreign exchange loss. As a result, 1HFY23 net profit plunged 57.5% as net profit margin narrowed to 6.5% (vs. 14% in 1HFY22).

Challenges to persist. The group is bracing for a tough operating environment in the coming quarters, especially in its China’s operation due to overall weakening demand as well as geopolitical tension. While the relaxation of China’s zero-Covid policy is a much welcomed move, the demand for chip packaging services remains uncertain as customers are still adopting the wait-and-see approach.

Forecasts. We cut our FY23-24F net profit by 34% and 14%, respectively.

Investment thesis. We like MPI for: (i) its strong exposure in the growing automotive semiconductor segment, (ii) its venture into promising new technology such as gallium nitride and silicon carbide, and (iii) its superior expertise in power management chip packaging for data centres. However, we remain cautious in the medium term owing to the on-going challenges such as: (i) slowing consumer electronic demand, and (ii) suboptimal plant utilisation rate due to cautious forecasts from customers amidst the economic uncertainty.

We cut our TP by 20% to RM20.00 (from RM25.00) based on an unchanged 18x CY23F PER, representing a c.20% discount from peers’ forward average to factor in the group’s unfavourable medium-term outlook. Our TP includes a +5% adjustment based on a 4-star ESG rating as appraised by us (see Page 4). Accordingly, we downgrade our call to UNDERPERFORM from MARKET PERFORM.

Risks to our call are: (i) a quicker-than-expected recovery in the global chip sector, (ii) de-escalation in the Sino-US chip war, and (iii) strengthening of the USD.

Source: Kenanga Research - 17 Feb 2023