MPI’s 1QFY14  results  trumped  expectations  on  the back of  the higher than  expected  EBITDA  margin.  We  opine  that  the  group’s  earnings turnaround  story  is  crystalising  and  revise  up  our  FY14/FY15  core earnings forecasts by 85%/51%. Our new MYR3.67 FV (from MYR2.76) is based on 1.0x CY14 P/NTA,  at a 30% discount to the historical  five-year sector average of 1.4x. Upgrade to BUY (from Neutral).

• Beat  expectations.  MPI’s  1QFY14  core  earnings  of  MYR16.7m (+>100% y-o-y, +58% q-o-q)  trumped  expectations, making up 53% and 51% of our and consensus full-year estimates.  This was  primarily due to improved  EBITDA  margin  (+6%  y-o-y,  +3%  q-o-q)  driven  by  its  highyielding  businesses  ie  high-density  packaging,  micro  leadframe packaging  (MLP),  and  test  services.  Currently,  these  three  segments contribute  >80%  of  total sales.  In addition,  the  appreciation  of USD  vs MYR  coupled  with  the  group’s  cost-cutting  initiative  helped  lift  profits. During the quarter, MPI declared an interim dividend of 5 sen/share.
• Outlook.  At the  last analyst briefing, MPI  projected  the sales volume of its newly developed ultra-thin quad-flat no-leads (QFN) package to gain traction  from  September  onwards.  Also,  it  believed  the  group  is  wellpositioned to outgrow the global semiconductor market in FY14 given its favourable product mix.
• Forecasts & risks.  Given  the strong set of results, we are revising up our  FY14/FY15  core  earnings  forecasts  by  85%/51%  after  cutting  our opex  assumptions  by  11%/15%  respectively.  The  key  risks  to  our forecasts are: i) strengthening MYR, ii) higher raw material costs, and iii) a slowdown in the semiconductor market.
• Valuations  &  recommendation.  Following  an  upward  revision  in earnings and based on a new valuation yardstick of 1.0x CY14 P/NTA (from  0.8x  CY14  P/NTA),  we  raise  MPI’s  FV  to  MYR3.67  (from MYR2.76).  Our new FV  implies  a P/E of  12x  on  CY14 EPS, which we deem  fair as it  is comparable to  its peers’ valuation  (see Figure  4). We opine that MPI’s earnings turnaround story  –  ie  moving into high-margin businesses  –  is crystalising given its two consecutive quarters of strong EBITDA margin. Upgrade to BUY (from Neutral).

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Company Profile
Malaysian Pacific Industries (MPI) manufactures, assembles, tests and markets integrated circuits, semiconductor devices, electronic components and leadframes to customers worldwide.

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Source: RHB