We emerged from MPI’s 1QFY20 investor briefing more optimistic on its ability to sustain its recovery, underpinned by its strong pipeline and increased activity at its China operations with the trade war prompting local design houses to increase the outsourcing of their assembly and testing needs to local players. Apart from this, management also shared that in view of the group’s strengthening pipeline, the group has begun expanding capacity at both its operations in China and Malaysia with CAPEX of US$50mn to be expended in phases from 3QFY19 to 3QFY20. Alongside the positive factors, we have assigned a higher PE of 16.5x (previously 14.0x) against CY20 EPS, which is +1SD to its 5-year mean of 12.5x. As we arrive at a higher TP of RM11.95 (previously RM10.40), we upgrade our recommendation on MPI from Sell to Hold.

2QFY20’s Revenue Guided to Improve Further QoQ

To recap, MPI’s 1QFY20 revenue and net profit fell 10.8% YoY and 13.0% YoY. Management attributed this to headwinds from the trade war and Brexit which resulted in reduced investments by auto makers while demand for new cars in Europe was also affected.

However, backed by its strong pipeline across regions, the group grew sequentially at both the top and bottom line for the second consecutive quarter with revenue and net profit up 6.7% and 22.4%. By end user market, revenue was led by consumer/communications (33%, -2pp YoY), and this was followed by automotive (32%, +2pp YoY), industrial (25%, unchanged YoY), and PC/notebook (9%, unchanged YoY). The improved mix from automotive is consistent with the group’s automotive centric strategy.

For 2QFY20, management guided revenue to be above USD$90mn which implies further improvement from 1QFY20’s of USD$88mn, albeit lower than 2QFY20’s of USD$95mn. However, note that downside risk remains from an escalation in the trade war which could cause customers to be more cautious and defer orders.

Expanding Capacity Due to Strengthening Pipeline

In the meantime, management also shared that in view of the group’s strengthening pipeline, it has begun expanding capacity. This will involve CAPEX of USD$50mn to be expended in phases from 3QFY19 to 3QFY20 with USD$33mn earmarked for Suzhou, China and the balance USD$17mn for Ipoh, Malaysia. Management also alluded that the group’s China operations has enjoyed increased activity with the trade war prompting local design houses to increase the outsourcing of their assembly and testing needs to local players, hence the need for further investments there. Current utilisation rates of operations in China and Malaysia (excluding test) are at ~100% and ~82% respectively. We are positive on MPI’s ability to sustain the new businesses into the longer term as we note that the wins were based on its merits i.e., product, quality, technology, and not at the expense of margins.

Plans to Grow Dynacraft, M&A Plans Intact, Shariah Conditions Met

In other areas, management also has plans to grow the group’s leadframe business Dynacraft (~5% of group revenue). We understand that this is a strategic endeavour to capitalise on opportunities coming from China in view of the country’s fast-growing wafer production and furthermore, competition within the leadframe market has also been easing with many players having exited the market. As for M&A, management reiterated that it remains on the lookout for targets with interest in modules, but the challenge has been finding the right fit. Meanwhile, we note that the group could regain its shariah status (removed in November 2018) as it has fulfilled all the necessary conditions. The Securities Commission will be releasing the next update of Shariahcompliant Securities at end-November 2019.

Impact

Our FY20/FY21/FY22 earnings estimates are adjusted by -2.4%/-3.7%/-2.6% after raising our CAPEX assumptions for FY20 from RM170mn to RM210mn to account for the expansion plans in China and Malaysia.

Valuation & Recommendation

In all, as we are now more optimistic on MPI’s ability to sustain its recovery, underpinned by its strong pipeline and increased activity at its China operations, we upgrade its TP from RM10.40 to RM11.95 after assigning a higher PE of 16.5x (previously 14.0x) against CY20 EPS which is +1SD to its 5- year mean of 12.5x. Also, with the improved risk reward potential, we upgrade our recommendation from Sell to Hold. 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 - 28 Nov 2019