MPI’s Suzhou plant has broken even ahead of its budget, led by improved orders for smartphone-related packages, which will continue to drive the group’s recovery momentum. Meanwhile, the visibility for its automotive orders remains lacking. We keep our forecasts but raise our TP by 12% to RM27.10 (from RM24.10). Maintain MARKET PERFORM.

We came away from MPI’s post-2QFY24 results briefing with mixed feelings. The key takeaways are as follows:

1. We were pleasantly surprised by MPI’s Suzhou plant in China having reached its break-even point in the just announced 2QFY24 results, with a 64% utilisation rate, four months ahead of its budget. The improvement was attributed to a brief uptick in orders for communication and smartphone-related packages which had shown signs of bottoming. Although the recovery fell short of a sharp rebound, it sent out strong signals that it is firmly on a recovery trajectory.

2. MPI’s strategic and efficient cost-control efforts already started to pay off in its 2QFY24 results with its net profit almost doubling QoQ despite flattish revenue performance. This was primarily attributed to the closure of its loss-making lead frame operations at Dynacraft Industries in Penang, which incurred RM10m in losses each quarter in the past. Additionally, the reduction of fixed costs through the relocation of machineries at its Suzhou plant enhanced floor utilisation.

3. Moving into 3QFY24, its performance is expected to stabilise with the enhanced utilization rate in Suzhou which will offset the seasonally weaker period and an upcoming one-off severance payment linked to the closure of Dynacraft Industries. Subsequently, its 4QFY24 is poised for a more notable improvement, driven by China's operations, particularly in the smartphone and PC/laptop segments. However, the automotive segment is showing no sign of immediate uptick as order visibility remains uncertain with weekly revisions from certain customers. In the long term, the group expresses optimism about its SiC business, expanding capacity in Ipoh (76k sq ft in M-site and 39k sq ft in S-site) to cater to growing demand from western and potentially relocating Chinese customers. 

Forecasts. Maintained.

Valuations. However, we raise our TP by 12% to RM27.10 (from RM24.30) based on a higher CY24F PER of 29x (from 26x). We remove the discount to the peer's forward average as a reflection of the improved outlook from Suzhou. Our TP reflects a 5% premium based on a 4-star ESG rating as appraised by us (see Page 4).

Investment case. 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 rather mixed with cloudy visibility from the automotive and data centre segments. Maintain MARKET PERFORM.

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 weakens.

Source: Kenanga Research - 23 Feb 2024