• Still BUY, new MYR44.80 TP from MYR37.70, 14% upside, c.1.2% FY24F (Jun) yield. We came away from Malaysian Pacific Industries’ post results briefing feeling bullish on its outlook with a much-positive guidance despite uneven recovery overall in the semiconductor space. We continue to like MPI’s earnings growth profile on improved utilisation with strong balance sheet with a net cash position of MYR958m. The strong products pipeline in the automotive segment and planned expansions are poised to capture various growth opportunities in the new semiconductor upcycle.

• Earnings recap. 9MFY24 core earnings of MYR119.8m (+62% YoY) exceeded expectations from higher-than-expected EBITDA margins on favourable FX. We exclude PPE impairments resulting from the cessation of Dynacraft Industries (Dynacraft), derivatives, and FX losses in arriving at our core earnings. An interim dividend of 25 sen was declared (ex-date: 4 Jun). 3QFY24 capex was at MYR92.5m (up QoQ from 2QFY24’s MYR21.9m), mainly to fund R&D and space expansion to meet rising business demand.

• Healthy orderbook. MPI remains bullish on the prospect of its upcoming quarters with a potential strong high double-digit growth QoQ into 4QFY24, backed by a healthy orderbook and improved utilisation despite the overall market uncertainty. Furthermore, the cessation of Dynacraft’s leadframe business will contribute positively to better margins and bottomline moving forward given its loss-making position. These, coupled with cost prudence measures, should help to sustain the improved profitability. Despite the uneven recovery, management said high power technology in silicon carbide (SiC) and gallium nitride (GaN) packaging will continue to grow at an exponential rate – supported by ongoing projects for the automotive and renewable energy sectors.

• Expansion plan. We expect the utilisation rate at Carsem Malaysia’s Suzhou plant to continue its uptrend amid a strong products pipeline and recovery of the semiconductor sector. The Suxiang expansion is on track to start production in 2025. The expansion at Carsem S-site is expected to start in 4QFY24, mainly to cater for the increasing demand in the SiC and GaN related packaging business. The newly constructed building at Carsem M-site will now house new automotive sensor packages, which is set to start contributing from 2HCY24.

• Forecasts and rating. We raise our FY24F-FY26F earnings by 16.5-9%, factoring in higher revenue and margin assumptions, resulting in a higher MYR44.80 TP – inclusive of a 2% ESG premium and based on a higher 30x target P/E (was 27x), at +2SD from its 5-year mean, on par with its peers. We believe MPI will continue demonstrating positive earnings trajectory and ride on the new semiconductor upcycle and capture the recovery in China. Downside risks: Slower-than-expected orders, loss of a major customer, technology obsolescence, and unfavourable FX.

Source: RHB Research - 21 May 2024