MPI hosted its 3QFY17 results briefing. While 3QFY17 results came within expectations, it would have been better if not for the temporary wafer supply constraints in the power management segment. Premised on a seasonal rebound and pick up in wafer releases, we expect a much better 4QFY17. Aims are to increase automotive contributions to 50% of revenues in three to four years. Working backwards, we expect the group to outpace the market with a 4-year revenue CAGR of 8.0% YoY. In line with this, we raise our FY17/FY18/FY19 earnings by 5.9%/13.6%/19.9%. We also see opportunities for excitement from potential M&A activities. This will be automotive centric, with management looking to acquire technologies to improve existing capabilities. We maintain our BUY call on MPI with an increased TP of RM13.15/share.

Wafer Constraints

Although 3QFY17 profit came in within expectations (refer to report dated 19th April 2017), results would have been much stronger if not for the temporary wafer supply shortages experience by its top 3 customers. Constraints, we understand, were faced mainly in the power management segment. 3QFY17 USD revenue was down 4% QoQ, but up 5% YoY. As a positive, its stable automotive segment continues to gain traction, with revenues estimated to be up 2.8% QoQ. Due to a lower than anticipated load, margins were also affected by overtimes claimed during the festive period. Premised on a seasonal rebound and pick up in wafer releases, we expect a much better 4QFY17.

Investing in Automation

Gearing towards automation, the group completed its investments in vision inspection equipment. However, immediate cost savings are unlikely to be realised, as the 519 workers are redirected to different roles to support expansion plans. 4QFY17 capex is expected to be minimal. Looking further ahead, FY18 capex is estimated to be similar to FY17 levels.

Outgrowing the Market

Once again, discussions during the briefing were centred on automotive efforts. Reiterating its aim, plans are to grow automotive revenue contributions to 50% (3QFY17: 50%) over the next two to four years. Based on our back of the envelope calculation, we estimate the group will need to achieve a revenue CAGR of 8.0% YoY over the next four years to meet this target. Backing these claims, its sales pipeline has been strengthening, with Carsem receiving an increasing number of NPIs (new product introduction). However, given the nature of the automotive business, this will require time but will provide increased stability to the business in the long run.

Outlining Acquisition Targets

Its balance sheet continues to improve, with net cash growing to RM419.7mn. Rewarding shareholders, a higher dividend total of 27.0sen/share (+17.4% YoY) was declared. Management remains on the lookout for automotive related acquisition targets. Providing more details, intentions are to acquire technologies to expand its existing capabilities. Examples provided include FO-WLP, module level assembly, thermal material (>100 W/mK), 2.5D & 3D packaging, cavity package (film insert mold), tri-temp automotive strip test and new automotive requirement (AEQ100-06 & higher temperature). Targets are expected to be within the range of US$20-25mn.

Revise Estimates Upwards

We adjust our revenue and margin assumption to be in line with the group’s automotive ambitions. We raise our FY17/FY18/FY19 earnings by 5.9%/ 13.6%/19.9% to RM187.3mn/RM230.0mn/RM268.3mn.

Valuation

We increase our TP for MPI to RM13.15/share – based on an EV/EBITDA multiple of 4.0x and CY18 EBITDA. We left the briefing feeling upbeat about the group’s target to outgrow the market, through its focus on the automotive segment. Coupled with its high barriers to entry, we believe this will provide steady growth and stability to its business. We also see opportunities for excitement with the possibility of M&A related activities. As such, we retain our BUY recommendation on the group

Source: TA Research - 20 Apr 2017