• Still BUY, lower MYR43.30 TP from MYR53.30, 28% upside with c.1% FY23F (Jun) yield. Following the first federal funds rate (FFR) hike, and upward revision of our in-house FFR forecasts, we bake in the aggressive rate hike expectation and high bond yields into our valuation parameters by lowering the target P/E to 26x from 32x. The current valuation of below 20x FY23 P/E presents a compelling entry level to its earnings visibility, recovery in the automotive sector, China’s localisation efforts, and its adoption of new packaging technology.

• The start of a rate hike cycle. With the US Federal Reserve’s hawkish tone alluding to another six rate hikes after last week’s 25 basis-point hike, the dust has settled, and the market is seemingly pricing in the aggressive expectations. Nonetheless, with the aggressive rate hike expectations baked in by the market, fewer rate hikes (than the expectation baked in number) would be positive for the market, should the high inflation scenario be contained. Our in-house economist is rulling out a stagflation event risk and expects the current UST10YR and MGS10YR yields to peak at around 2.0-2.2% and 3.65-3.75%, which are still relatively lower than the 2018- 2019 levels.

• Lowering our target P/E valuation. Following the first FFR hike and upward revision of our in-house FFR forecasts to 1.75-2.0% (from 1%) by end-2022 and to 2.25-2.50% (from 1.5%) end-2023, we take the opportunity to build in the new expectations and cut our CY22 target P/E for MPI to 26x (+1SD from the 5-year mean) from 32x (+3SD from the 5-year mean). Consequently, our TP is reduced to MYR43.30, after imputing a 2% ESG premium, based on our proprietary methodology and MPI’s 3.1 ESG score.

• Reiterate BUY. We expect resilient demand for OSATs, amid chip shortages and production bottlenecks, following robust shipments growth of 14% YoY for silicon wafers in 4Q21. BUY on current share price weakness, as we remain upbeat on MPI’s earnings visibility, with additional capacity coming on stream, the recovery in the automotive sector, China’s localisation efforts, and its adoption of new packaging technology. Also, its rock solid balance sheet with a net cash per share of MYR4.23 should enable inorganic growth opportunities.

• Downside risks: Slower-than-expected orders and stronger-than-expected MYR vs USD.

Source: RHB Research - 21 Mar 2022