Review

• MPI’s 1QFY20 net profit of RM36.8mn (+22.4% QoQ, -13.0% YoY) came within expectations, accounting for 27.4% and 25.2% of ours and consensus full-year estimates respectively. Separately, a first interim dividend of 10.0sen/share (unchanged YoY) was declared.

• YoY. 1QFY20’s revenue and net profit declined 10.8% and 13.0% to RM369.1mn and RM36.8mn. This was mainly due to the trade war which caused customers to be cautious and keep a lid on inventory levels.

• QoQ. 1QFY20’s revenue and net profit increased 6.7% and 22.4% to RM369.1mn and RM36.8mn. It was also the second consecutive quarter of sequential top-line growth with 4QFY19/1QFY20’s revenue in USD +4.3%/+6.3%. We believe that the recovery was underpinned by: 1) the group’s new designs/products, and 2) increased activity at its China operations fuelled by the trade war which has prompted local IC design houses to increase the outsourcing of their assembly and testing needs to local players. The greater activity coupled with cost efficiency measures also resulted in improved profitability with EBITDA margin higher 1.4pp to 25.3% versus our forecast of 24.3%.

• Meanwhile, the group’s financial standing strengthened further with a robust net cash position of RM760.7mn or RM3.62mn/share (+6.6% QoQ, +18.1% YoY).

Impact

• We have performed housekeeping to our model to reflect the group’s higher profitability versus our forecast. Upon raising our EBITDA margin assumptions higher by ~1pp, our FY20/FY21/FY22 earnings estimates are raised by 7.5%/7.0%/6.5% to RM144.3mn/RM168.5mn/RM189.1mn.

Outlook

• While we are sanguine on MPI’s automotive and industrial centric strategy, we expect its near-term performance to remain challenged by headwinds from the prolonged and heightened trade war. That said, we believe that the downside risk could be cushioned by greater traction from the group’s China operations which management earlier alluded has been seeing opportunities from local IC design houses looking to outsource their assembly and testing needs to local players against the backdrop of the trade war. Moreover, the group’s strong balance sheet should also well support any plans to expand capacity.

Valuation & Recommendation

• Following the earnings upgrade and assigning a higher PE multiple of 14.0x (previously 12.0x) which is +0.5SD to the stock’s 5-year mean of 12.5x, our TP for MPI is raised to RM10.40/share. However, we reiterate our Sell recommendation as we opine that the stock is fairly valued at current levels. Key downside risks include: 1) escalation in global trade tensions, 2) a strengthening of the ringgit against the USD and 3) surge in commodity prices (i.e., copper and gold).

Source: TA Research - 27 Nov 2019