1HFY16 (Jun) core earnings of MYR84.4m came within our expectations. Maintain BUY with our TP trimmed to MYR11.64 (from MYR12.17, 34% upside). Management, however, turned more cautious on its near-term outlook, given the global macroeconomic uncertainty.

Results review. 1HFY16 core earnings of MYR84.4m (+92% YoY) came within expectations at 51.1%/55.3% of our/consensus full-year estimates respectively. The strong YoY performance was driven by higher overall utilisation rates at an estimated 80%-85% for the period (vis-à-vis sub-80% in 1HFY15), while USD/MYR averaged at 4.17 (vs 3.28 in 1HFY15).

Briefing highlights. Management is expecting a single-digit QoQ decline for 3QFY16 due to seasonal softness and given the global macroeconomic uncertainty. It acknowledged that January has thus far been slower than anticipated, but indicated that volume guidance from some of its customers has started to pick up. Management hopes to commence component production for next-generation smartphones by May/Jun 2016. MPI also incurred realised forex losses of approximately MYR16m during the quarter, due to USD/MYR volatility and its unchanged hedging policy of 40-50% of its net receivables.

Earnings revision. We trim our FY16F-18F EPS by 2.7-5.9%, factoring in slower volume growth and higher ASP erosion, after taking into consideration management’s more cautious tone on its near-term outlook.

Risks. Key risks include: i) potential reversal of the MYR’s current downtrend against the USD, ii) further global economic slowdown, which in our view would affect consumer spending on technology products, and iii) escalating competitive pressure from its domestic and regional peers.

Maintain BUY. We lower our TP to MYR11.64 (from MYR12.17) based on an unchanged 15x 2016F P/E, following our earnings revision. Given the appealing upside of over 34%, we maintain our BUY call. We use DCF (WACC: 9.4%, TG: 0.5%) as a corroborative valuation deriving a fair value of MYR12.87, which we deem reasonably close to our revised TP.

DCF valuation. Under our corroborative DCF valuation, we assume an annual capex allocation of MYR220m-230m pa in the foreseeable future and a terminal growth rate of 0.5%. The derived equity value of MYR12.87 translates into 16.5x 2016 P/E, which we deem to be reasonably close to our target multiple of 15.0x.

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Company Profile

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

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Source: RHB Research - 29 Jan 2016