• Stay BUY, higher MYR35.90 TP from MYR30.00, 16% upside, c.2% FY25F (Jun) yield. Malaysian Pacific Industries is expected to benefit greatly from the new semiconductor upcycle. The sector has seen the worst and should re- rate as investors reposition into the sector to ride on the next wave of growth. Improved utilisation rates – particularly in China – combined with a strong product pipeline across various segments should drive strong earnings recovery. The proliferation of silicon carbide (SiC) packaging and expansion initiatives in China should serve as further growth catalysts.

• 1HFY24 earnings recap. 1HFY24 core profit stood at MYR72.9m (-13.3% YoY), surpassing our expectations at 60.7% of full-year forecasts (52.6% of consensus’) – driven by higher-than-expected EBITDA margins and interest income. Although 1HFY24 revenue fell 5% YoY to MYR1.04bn, EBITDA margins improved by 30bps YoY to 25.2%, supported by favourable FX movements despite being impacted by PPE impairments totalling MYR8.9m.

• Positive earnings trajectory. The uptick in semiconductor demand, as evidenced by world semiconductor sales data published by WSTS and SIA, signals the onset of a new semiconductor cycle. While near-term recovery may vary across segments, MPI's earnings trajectory appears to have bottomed out following a stronger 2QFY24 performance. We anticipate significant earnings improvement in the second half of CY24 and further growth in FY25, supported by early indicators of demand recovery, especially from various power management integrated circuits (ICs). A robust pipeline and record-high new project introductions should boost utilisation rates. Improvements are anticipated in the Suzhou plant as the Chinese market shows signs of recovery, driven by increasing demand for electronic devices.

• Growth beyond the sector recovery. MPI is positioned for further growth with expansion plans in Ipoh and China, and is poised to capitalise on the new upcycle once utilisation rates improve, with enhanced order visibility and client commitments. The plant expansion in Suxiang – doubling its floor space in China – is expected to commence in 2025 after several delays due to sector weakness. The structural growth in SiC and gallium nitride (GaN) packaging should continue to drive MPI's long-term growth roadmap.

• Forecasts and TP. Following a review, we revise our FY25F-26F earnings down by 14.3%-14.7% on slower revenue growth assumptions and conservatism, with expected uneven growth across various segments. We roll forward our valuation base year to FY25F (Jun) from CY24F, resulting in our higher MYR35.90 TP – based on an unchanged 27x P/E (+1.5SD from its 5-year mean) but on par with KLTEC. Our TP includes a 2% ESG premium. Downside risks: Slower-than-expected orders, loss of major customer, technology obsolescence, and unfavourable FX.

Source: RHB Research - 1 Apr 2024