• Still NEUTRAL, slightly lower MYR28.80 TP from MYR29.50, 10% upside, c.2% FY24F (Jun) yield. Malaysian Pacific Industries’ FY23 core profit of MYR80.6m (-74.7% YoY) beat expectations on higher-thanexpected EBITDA margins amid a stronger USD in 4QFY23. While a better FY24F is on the cards, we keep our ratings as the expectation of a gradual and uneven recovery – instead of a J-curve – into FY24F is priced in at current valuations.

• Above expectations. FY23 revenue of MYR2.05bn (-15.4% YoY) translated to a core PATAMI of MYR80.6m – at 112.9% and 120.6% of our and consensus’ full-year forecasts. FY23 EBITDA margin contracted 8.1pts YoY to 21.9% due to loss of economies of scale, losses from its China operations, and higher electricity and staff costs, which caused a 74.7% YoY slump in group core profit. Revenue for Asia fell 30% YoY, partially cushioned by better US (+6%) and Europe (+12%) sales.

• Better sequentially. Marginally higher 4QFY23 revenue (+2.2% QoQ) on the back of a stronger USD and better cost controls contributed to a sharp improvement in bottomline to MYR6.6m from a MYR10.1m loss in the preceding quarter. YoY core profit tumbled 91.6% on the back of lower revenue (-21.2%), compounded by the high operating leverage business model. Note that we adjusted for FX losses/gains and fair value losses/gains on derivatives to arrive at our core profit.

• Yet to see a sustainable recovery in demand. Although sluggish demand persists in the consumer electronics market amid sector-wide prolonged inventory adjustments, we expect a stronger 1HFY24 on seasonal factors from an uneven recovery in loadings with certain weaknesses in server and automotive customers in Carsem Ipoh. As guided previously, the plant expansion at Suxiang will be delayed by at least a year to 2025 as management aims to fill up its currently underutilised capacity in Suzhou. Nonetheless, the additional levels at the S-Site test area (c.35k sq ft) should be ready by 2QFY24, while the new production building in front of M-Site is only expected to start production by Aug 2024.

• Maintain forecasts other than a -1% to -2% FY24F-25F earnings tweak for our model-upkeeping exercise following the release of FY23 numbers. Consequently, our TP is lowered to MYR28.80 (inclusive of 2% ESG premium), based on unchanged 27x P/E, at +1.5SD from its 5-year mean. Notwithstanding the improved market sentiment, expectations of a gradual volume recovery amidst the semiconductor industry’s prolonged downcycle is in the price. Investors with medium-term horizons can look at MPI’s exposure to the power module in silicon carbide packaging and gallium nitride for the automotive electrification space. Downside/upside risks: Slower/stronger-than-expected orders, and unfavourable/ favourable FX.

Source: RHB Securities Research - 29 Aug 2023