Post MPI’s 4QFY23 investors briefing, we maintain our earnings forecast and Buy recommendation on MPI with an unchanged TP of RM32.15 based on a PE multiple of 26.0x CY24F EPS. Into 1QFY24, management cited the still challenging operating environment, especially amid China’s economic slowdown. While guiding that the near-term outlook remains cloudy, management also shared that MPI’s loss-making China operations have continued to recover, albeit gradually. In the meantime, to capture the next wave of opportunities, the group has focused on investments related to electric vehicles, silicon carbide and gallium nitride technologies, 5G testing, and MEMS sensors, among others.

FY23: Dragged by Weak End-Market Electronics Demand

To recap, FY23 was a challenging year for MPI, with the group not spared from the semiconductor industry’s cyclical downturn. Coming off a record year, broad-based weak end-market electronics demand led revenue to lower 15.4% YoY to RM2,044.7mn. Coupled with cost pressures and heavier depreciation and amortisation, which resulted from the ramp-up of capital expenditure in recent years, net profit sank 81.3% YoY to RM61.3mn.

Positively, there was a sign of bottoming out with 4QFY23’s USD revenue flat QoQ at USD107mn. Aided by better cost management and the stronger USD versus Ringgit, MPI returned to the black with a net profit of RM8.1mn after briefly slipping into the red in 3QFY23 with a net loss of RM17.8mn. During the quarter, contributions as a % of total revenue by the end-user market were led by automotive at 43% (+5pp YoY) and followed by industrial at 38% (+6pp YoY), consumer/communications at 13% (-9pp YoY), and PC/notebook at 5% (-2pp YoY).

FY24: Near-Term Outlook Remains Cloudy

Into 1QFY24, management cited the still challenging operating environment, especially amid China’s economic slowdown. Weak end-market electronics demand has seen projects delayed to future quarters. While guiding that the near-term outlook remains cloudy, management also shared that MPI’s lossmaking China operations have continued to recover, albeit gradually. On a brighter note, management also reaffirmed that MPI has maintained a healthy order book.

Remain Sanguine on Medium to Long Term Prospects

Beyond prevailing market softness, we remain sanguine on MPI’s medium-tolong-term prospects. To capture the next wave of opportunities, management reiterated the group’s focus on investments in electric vehicles, silicon carbide and gallium nitride technologies, 5G testing, and MEMS sensors, among others.

In tandem, we note that the group’s large-scale expansion plans remain on track. This includes expansion in Malaysia (via one new plant opposite Carsem MSite with targeted commencement in August 2024 and additional floor space in Carsem S-Site) and Suxiang, China (via one new plant in Suxiang with targeted commencement in January 2025).

Of note, in view of China’s fast-growing electric vehicle market, management also alluded to MPI’s efforts to increase the share of automotive segment contributions in its China operations, which is currently focused on the consumer segment. Supportive of this, the group has 83 automotive projects in different stages of the pipeline while it is also transferring technology and experienced manpower from its Malaysia operations.

Valuation & Recommendation

In all, we maintain our earnings forecast and Buy recommendation on MPI with an unchanged TP of RM32.15 based on a PE multiple of 26.0x CY24F EPS. We continue to like MPI for its automotive-centric strategy as it seeks to capitalise on the promising prospects for content gains within vehicles, catalysed by the global transition to electric vehicles and autonomous driving, among others.

Key downside risks include weaker-than-expected loadings, geopolitical tensions weighing on economic growth and disrupting supply chains, a strengthening of the Ringgit against the USD, and a surge in commodity prices.

Source: TA Research - 30 Aug 2023