• NEUTRAL, lower MYR25.70 TP from MYR30.50, 8% downside. Malaysian Pacific Industries slumped to a MYR10.1m loss in 3QFY23 for the first time in years, coming in below expectations due to significantly lower topline and margin compression from the loss of economies of scale – further compounded by higher costs. It declared a second interim dividend of 25 sen/share (ex-date: 1 Jun). We cut earnings on expectations of prolonged weakness in volume loading, but maintain our call as we believe the numbers will recover gradually in a seasonally stronger 2HCY23.

• Missed expectations. 9MFY23 revenue of MYR1.5bn (-13.4% YoY) and core PATAMI of MYR74.0m accounted for only 37.3% and 42.0% of our and consensus’ full-year forecasts. Slower-than-expected revenue and EBITDA margin, coupled with higher depreciation charges led to the underperformance. EBITDA margin contracted 13.1pts YoY to 17.2% due to loss of economies of scale, losses from China operations, and higher electricity and staff costs. All in, revenue weakness in Asia (-28% YoY) was partially cushioned by better US (+3%) and Europe (+18%) sales.

• From bad to worse. 3QFY23 revenue dipped to MYR471.9m (-22.8% YoY, -10.4% QoQ) leading to the first quarterly loss of MYR10.1m in years. This is attributable to prolonged demand weakness for consumer electronic products and the semiconductor downcycle. Its Suzhou plant continued to be loss-making amid low utilisation and high depreciation charges. Note that we have adjusted for FX losses of MYR8.1m and fair value gains on derivatives of MYR0.4m to arrive at our core profit.

• Waiting for light at the end of the tunnel. Sluggish demand in the consumer electronic markets should continue into 4QFY23, given the sector-wide prolonged inventory adjustments, with expectations of a gradual improvement going into 1HFY24. The loading factor at the M-Site and S-Site should be cushioned by relatively healthy demand from automotive customers, while Suzhou will continue to be challenging.

• We cut FY23F-25F earnings by 47.7% to 14.1% to account for prolonged demand weakness and loss of economies of scale, resulting in our lower MYR25.70 TP, based on unchanged 21x P/E, in line with its mean. While we believe near-term weakness may continue into 4QFY23 – especially for its China operations – medium term prospects remain bright with its exposure to the power module in silicon carbide packaging and gallium nitride for the automotive electrification space. Key risks: Slower/stronger- than-expected orders and unfavourable/favourable FX.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our thematic research note Envisioning a Better Future. Our TP includes a 2% ESG premium.

Source: RHB Research - 19 May 2023