MPI held its quarterly results briefing. Its strong performance in 2QFY17 was driven by better underlying sales, the weak ringgit and lower costs. The mobile segment remains challenging, but some business is coming back from Chinese smartphone manufacturers. Its primary focus is still on automotive, where it is in contention for more product wins in coming quarters. Its eventual aim is to grow automotive contributions to 50% of revenue. Supported by its net cash pile (RM387.0mn), management is on the lookout for potential acquisitions. This is likely to be automotive centric with potential synergistic benefits. Maintain BUY on MPI with a TP of RM9.40/share.

More Details on 2QFY17 Results

The group reported a strong 2QFY17, with revenue and net profit jumping 12.1% QoQ and 38.4% QoQ. Results were driven by better USD sales (+5% QoQ), a weaker ringgit (USD/MYR rate: +6.7% QoQ) and lower costs. Broad based strength was seen across segments, with consumers/communications and automotive growing by an estimated 17.9% QoQ and 12.1% QoQ. The overall market for mobile remains challenging. But there are pockets of opportunities, with increased business seen from Chinese smartphone manufacturers. No guidance was provided for the coming quarter, but we do expect some seasonal softness in line with CNY celebrations.

Automotive is Primary Focus

Showing results, its automotive segment is gaining traction. Among products currently produced include tyre pressure monitors, proximity sensors and airbags. As proof of trust, it is currently the single source of airbags for one of its customer. We understand there are a lot of interest from potential customers, with it being in contention for more product wins in coming quarters. Eventually, aims are to grow automotive contributions to 50% of its total revenue (2QFY17: 24%). We are positive on its exposure to the automotive sector, due to its high barriers of entry and stable recurring income.

On the Hunt

Net cash grew to RM387.0mn (+15.5% QoQ) in 2QFY17. Management remains on the lookout for potential acquisitions. Acquisitions will likely be automotive centric. Targets are expected to be synergistic, potentially improving areas such as packaging technology, materials, machines and/or efficiency. With nothing concrete, targets are estimated to be within the US$25.0-35.0mn range. Meanwhile, implying a pickup in capex (1HFY17: RM40.0mn) towards the second half, capex is guided to be at similar levels to FY16 (RM125.1mn).

Valuation

We leave our earnings unchanged at this moment, but do not discount potential upsides if the ringgit remains at current levels. Our TP for MPI remains at RM9.40/share – based on an EV/EBITDA multiple of 3.5x and CY17 EBITDA. Key buying points are: 1) Exposure to fast growing automotive segment; 2) Beneficiary of weak ringgit and 3) Strong balance sheet may result in potential acquisition activities and/or increased dividends. BUY

Source: TA Research - 27 Jan 2017