Review

• MPI announced its 1HFY17 results, achieving a net profit of RM94.7mn (+38.4% QoQ, +5.4% YoY). Results came within ours, but above consensus expectations at 53.5% and 60.0%. No dividends were declared.

• QoQ. The jump in earnings sequentially was due to the weaker ringgit (+6.7% QoQ) and growth in underlying USD sales. Based on our estimates, USD sales increased 5.1% QoQ, beating our expectations of a flat to marginal increase. Sales were up across all regions, in the USA (+19.8% QoQ), Asia (+11.4% QoQ) and Europe (+7.2% QoQ).

• YoY, although revenue was flat, earnings benefitted from lower depreciation and amortisation (-12.7% YoY) expenses. Positively, USD sales appears to be gradually recovering, marking its third consecutive quarter of sequential growth.

• Its net cash pile continues to grow, increasing 15.5% QoQ to RM387.0mn (24.5% of its market cap).

Impact

• We leave our earnings estimates unchanged. Our earnings is based on a USD/MYR rate assumption of RM4.23 for FY17. There could be potential upsides to our forecasts, if the ringgit remain at existing levels. We estimate every 1.0% increase in the USD/MYR rate, increases our earnings by 4.0%, ceteris paribus.

Outlook

• The automotive industry is one of the fastest growing segments with a projected 5-year CAGR of 4.9% YoY. Well positioned, the group already has existing coverage of 7 out of the top 10 automotive suppliers. The more stable nature of automotive sales will help ease volatility from the smartphone market. Within two years, targets are to expand automotive contributions at M-Site from 40% to 70% (ca. 40% of Carsem revenue).

• Rerating catalysts can come in the form of potential acquisitions or exercises to improve liquidity. While there is nothing concrete at the moment, the group is on the lookout for acquisitions. We also do not discount the possibility of increased dividends, supported by its healthy projected FCFE of 94.7sen/share (translating into a FCFE yield of 11.9%).

Valuation

• Our TP for MPI is unchanged at RM9.40/share – based on an EV/EBITDA multiple of 3.5x and CY17 EBITDA. We like the group as a beneficiary of the current weak ringgit environment. Underlying sales should also benefit from its focus on the fast growing and stable automotive segment. Potential catalysts include dividend upsides and/or acquisition activities. BUY.

Source: TA Research - 26 Jan 2017