• Downgrade to NEUTRAL from Buy, with new MYR30.50 TP from MYR31.70, 10% downside. 1HFY23 (Jun) PATAMI of MYR84.1m came in lower-than-expected due to the slower margin and topline mainly from the low utilisation rate at the Suzhou plant, compounded by higher costs but partially cushioned by favourable FX. We cut earnings and downgrade our call following Malaysian Pacific Industries’ share price strengthening and expectations of prolonged weakness in volume loading.

• Missed expectations. 1HFY23 revenue of MYR1.09bn (-8.6% YoY) and core PATAMI of MYR84.1m only accounted for 33% and 34.9% of our and consensus full-year forecasts. The main deviations were slower-than- expected revenue and EBITDA margin, which contracted by 4.1pts YoY to 26% amid the low utilisation at the Suzhou plant, higher depreciation charges, as well as electricity and staff costs. All in, the weakness in Asia’s revenue (-22% YoY) was partially cushioned by better US (+3%) and Europe (+24%) sales.

• Sequential weakness. 2QFY23 revenue and PATAMI were MYR526.4m (-13.4% YoY, -6.7% QoQ) and MYR34.4m (-58.8% YoY, -30.9% QoQ) as the weak demand for consumer electronic products continued to swing its Suzhou plant into losses, but partially cushioned by favourable FX. Note that we have adjusted for the loss in FX amounting to MYR20.8m and fair value gain on derivatives of MYR4.8m in arriving at our core profit.

• Undermined by prolonged sluggish demand. Management is anticipating another slow quarter into 3Q amid sluggish demand in the consumer electronic markets, with a gradual improvement in demand in China post- reopening. However, demand at the M-Site and S-Site remains relatively healthy, helping to cushion the weakness from the Suzhou plant, given the relatively solid demand for micro-electromechanical systems or MEMS sensors and automotive products.

• Forecasts. We cut our FY23F-25F earnings by 22-14% to account for the prolonged weakness in the demand and higher cost assumptions, resulting in a lower TP of MYR30.50, as we roll forward the valuation base year to FY24F, based on an unchanged 21x P/E, in line with its mean. Note, a 2% ESG premium is baked into the TP, based on our proprietary methodology.

• Downgraded. Following the run-up in share price over the past months, we believe the current valuation of MPI is fair considering the near-term prolonged weakness in its China operations. However, we like the mid-term prospects for its exposure to the power module in silicon carbide packaging and gallium nitride for the automotive electrification space, as well as being a prime beneficiary of the swift recovery in the overall semiconductor space.

• Key risks include slower/stronger-than-expected orders, material shortages, and unfavourable/favourable FX movements.

Source: RHB Research - 17 Feb 2023