• Stay NEUTRAL, with new MYR29.50 TP from MYR25.70, 1% upside. We cut Malaysian Pacific Industries’ earnings on expectations of prolonged weakness in volume loading, stemming from anecdotal evidence of the supply chain and peers. Upcoming results will continue to be undermined by the low utilisation rate in Suzhou, coupled with escalation in input costs. Our call is premised on improved market sentiment, and we believe the expectation of a gradual recovery into FY24F (Jun) is currently priced in.

• 3QFY23 earnings recap. MPI slumped to a MYR10.1m loss in 3QFY23 for the first time in years, with 9MFY23 core PATAMI of MYR74.0m (-69% YoY) coming in below expectations due to slower-than-expected revenue and EBITDA margin, which contracted 13.1ppts YoY to 17.2% – attributable to the loss of economies of scale, losses from China operations, and higher electricity and staff costs.

• Compounded by cost escalation. Low utilisation at the Suzhou plant was one of the main factors for the drop in profitability, given the loss in the economies of scale. Amongst others, higher electricity and staff costs contributed to the additional costs of MYR50-60m pa that further compounded the situation, along with higher depreciation charges from its various expansions.

• A patchy recovery. Drawing inferences from the latest round of results and guidance from industry players, we expect the semiconductor sector to see challenges in 2HCY23 with uneven demand recovery in different sub- sectors. While the utilisation rate in Suzhou should inch higher going into 2H, from 30% in 3QFY23F amid a seasonally stronger period – especially for smartphones – the recovery is not expected to be significant, with further weakness seen in the entire industry. The loading factor at the M-Site and S-Site may also see certain weakness in server and automotive customers.

• Delay in Suxiang plant expansion. Amid prolonged demand weakness for consumer electronic products and the semiconductor downcycle, the plant expansion at Suxiang will be delayed by at least a year to 2025 as management strives to fill up its current under-utilised capacity in Suzhou. Nonetheless, the additional levels at the S-Site test area (c.35k sq ft) should be ready by 2QFY24F while the new production building in front of M-Site is only expected to start production by Aug 2024.

• FY23F-24F earnings are cut by 31.4%-51.5% to account for the prolonged sector downcycle and patchy recovery path. However, our TP – inclusive of a 2% ESG premium – is raised to MYR29.50 as we roll forward our base year to CY24, based on a higher target P/E of 27x, or at +1.5SD from its 5- year mean. This is on the back of improved market sentiment and potential peaking of the Federal Funds Rate.

• Key risks: Slower/stronger-than-expected orders, and unfavourable/ favourable FX.

Source: RHB Research - 2 Aug 2023