MPI’s FY23 results beat expectations. It turned profitable in 4QFY23 (vs. our expectations of another quarterly loss) thanks to effective cost control and favourable forex movements. It appears to have found a way to navigate the current sector slowdown. We maintain our FY24F net profit but raise our TP by 58% to RM24.05 (from RM15.26) and upgrade our call to MARKET PERFORM from UNDERPERFORM.

Above expectations. MPI’s FY23 core net profit of RM61.3m (-81% YoY) missed consensus full-year forecast by 11% but exceeded our estimate by 59%. The large variance against our forecasts was mainly due to betterthan-expected cost control coupled with slight revenue improvements which helped the company to turn profitable in 4QFY23 instead of another quarter of losses which we anticipated.

Results’ highlights. YoY, MPI's FY23 revenue saw a 15.4% decline, primarily attributed to reduced orders in Asia (-29.9%), overshadowing gains from the USA (+6.5%) and Europe (+12.0%). This decline reflects the muted global economy outlook, resulting in weakened demand for consumer electronics and cautious spending in industrial sectors. However, on a QoQ basis, 4QFY23 revenue showed a modest 2.2% increase as demand in the Asian region improved, registering a 0.6% QoQ uptick. Coupled with diligent cost management by the management team, the group achieved profitability in 4QFY23.

Room to improve. While the swing to profitability is an encouraging sign, MPI is still far from its glory days as it is not immune to the global slowdown in semiconductor demand. This is also echoed by a series of uninspiring tech earnings releases which resulted from a slower-thanexpected recovery ramp up in China. Moving forward, the company still has to battle with various challenges from lacklustre order replenishment to managing costs with the heightened operating cost from increased wages and electric tariffs. However, we understand that MPI has been known to be one of the more resilient companies in facing adversities as proven by its superb track record during the Covid-19 pandemic.

Forecasts. We maintain our FY24F net profit and introduce our FY25F net profit (+46%).

We raised our TP by 58% to RM24.05 (from RM15.26) on a rolled forward earnings base to CY24F, pegged to higher PER of 23x (from 18x) as we removed the discount to average peer’s forward mean on improved earnings delivery. Our TP includes a +5% adjustment based on a 4-star ESG rating as appraised by us (see Page 4).

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, its prospects over the medium term will be clouded by slowing consumer electronics and data centres demand, resulting in sub-optimum plant utilisation. That said, we believe the recent sell-down in share price has largely accounted for the risks and we therefore upgrade our call to MARKET PERFORM from UNDERPERFORM as its valuation has become less stretched.

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

Source: Kenanga Research - 29 Aug 2023