We expect MPI’s near-term earnings momentum to sustain on the persistent weakness of MYR against USD. As such, we maintain our BUY call with our TP upgraded to MYR12.17 (from MYR11.46, 26% upside), factoring in our revised USD/MYR assumptions going forward.

1QFY16 (Jun) was no fluke. Recall that Malaysian Pacific Industries’(MPI) 1QFY16 results trumped expectations as demand, ASPs andprofitability margins all held up better than expected, while the USD remained favourable at an average of MYR4.05 in 1QFY16. In our last meeting, management turned more cautious on its near-term outlook due to potential weakness in demand for smartphones from China on inventory correction. That said, we expect another decent set of 2QFY16 results (to be released by Jan/Feb 2016), driven predominantly by the persistent weakness of MYR against USD, which averaged MYR4.28 inOct-Dec 2015. We estimate that 2QFY16 core earnings would come in at MYR40m-45m.

Potential bumper dividend. While our FY16F-18F dividend yield of 2.1-2.6% pa may seem unexciting, we acknowledge that our target payout ratio of 23-25% is relatively conservative. We do not discount the possibility of dividend surprises given its growing net cash pile (MYR0.68/share as at September) and its existing 11m treasury sharesheld.

Earnings revision. We upgrade our FY16F-18F EPS by 4.4-10.7% as we revise our USD/MYR assumptions to MYR4.34 going forward (from MYR4.10-4.20 previously) while tweaking our ASPs in USD lower – as we expect its direct customers to push for more competitive pricing in view of the current MYR weakness. Key risks include: i) the strengthening of the MYR against the USD, ii) higher raw material costs, and iii) a slowdown in the global semiconductor market.

Maintain BUY. We revise our TP to MYR12.17 based on an unchanged 15x 2016F P/E following our earnings revision. Given the appealingupside of over 25%, we are maintaining our BUY recommendation. We used DCF (based on WACC of 9.3% and terminal growth rate of 0.5%) as a corroborative methodology and derived a fair value of MYR12.32which we deem reasonably close to our revised TP.

DCF valuation. Under our corroborative DCF valuation, we assume annual capex allocation of MYR200m pa in the foreseeable future and a terminal growth rate of 0.5%. The derived equity value of MYR12.32 translates into 15.2x 2016F P/E, which we deem to be reasonably close to our target multiple of 15x.