Kenanga Research & Investment

Malaysian Pacific Industries - Recovery Path Remains Shaky

Publish date: Mon, 22 May 2023, 09:35 AM

MPI anticipates another loss-making quarter in 4QFY23, albeit with  reduced losses. Its recovery path in China is still highly uncertain as its customers are still reluctant to commit to sizeable orders,  wary of macroeconomic headwinds. It has deferred its new plant in  China, for a second time, to Jan 2025 at a fine of USD$900k. We cut FY23-24F net profit by 76-38% and reduce our TP by 24% to  RM15.26 (from RM20.00). Maintain UNDERPERFORM.

We came away from MPI’s post-3QFY23 results briefing feeling cautious  on its outlook. The key takeaways are as follows:

1. MPI highlighted persistent challenges in its operating environment. It  anticipates another loss-making quarter in 4QFY23, albeit with  reduced losses, due to the underperforming Suzhou plant. With the  plant continuing to operate well below breakeven levels, its recovery  path is still highly uncertain. Similarly, the group’s Ipoh plant, while  still maintaining a stable utilisation rate, is experiencing a slight  revenue deceleration due to different product mix (i.e. slowdown in  demand for power packages from data centres) as well as  customer’s request for cost reduction for matured packages.

2. To curtail the escalation of depreciation expenses, the group has  opted to defer the completion of its new plant in China for the  second time to January 2025 (previously rescheduled from Dec  2023 to Apr 2024), incurring a fine of US$900k. The adjustment  reflects customers’ hesitancy to increase order volumes due to  concerns on prevailing macroeconomic uncertainty.

3. It will be very careful with capex spending moving forward. It is in  discussion with a few potential customers to take up the capacity at  its recently completed facility in M-site Ipoh but has yet to secure  any. Meanwhile, it is adding a new floor at S-site Ipoh to specifically  cater to Silicon carbide (SiC)-related businesses.

Forecasts. We cut our FY23F and FY24F net profit by 76% and 38%, respectively.

Investment thesis. We continue to like MPI for its: (i) growing presence  in the high-growth automotive segment, (ii) first mover advantage in the  highly promising new technology based on silicon carbide and gallium  nitride, and (iii) its superior expertise in power management chip  packaging for data centres. However, its prospects over the medium term will be clouded by slowing consumer electronics and data centres demand, resulting in sub-optimum plant utilisation.

We cut our TP by 24% to RM15.26 (previously RM20.00) based on unchanged 18x FY24F PER, representing a c.20% discount from peer’s  forward average to factor in the group’s unfavourable outlook. Our TP  reflects a +5% adjustment based on a 4-star ESG rating as appraised by us (see Page 4). Maintain UNDERPERFORM.

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) further  strengthening of the USD.

Source: Kenanga Research - 22 May 2023

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