Investment Highlights

• We downgrade Malaysian Pacific Industries (MPI) to HOLD (from BUY) with a lower fair value of RM28.00/share (from RM38.40/share) due to pared down CY23F EPS and target PE of 18x (from 20x previously) which is at parity to its 5- year mean.

• The downward revision of our target PE is in view of the growing macroeconomic uncertainties that pose a downside risk to earnings. Also, we continue to ascribe a neutral ESG rating of 3 stars to MPI.

• MPI’s 1QFY23 net profit of RM53mil was below expectations, accounting for 16% of our and consensus’ full-year forecasts. The negative variance is mainly attributed to lower-than-expected sales and gross margin compression.

• Post-results, we revised downwards our FY23F-FY25F earnings by 10%-26% after imputing more conservative sales assumptions and gross margin.

• The group’s 1QFY23 net profit shrank 36% YoY, in tandem with a 4% decline in revenue and a 3%-point contraction in EBITDA margin to 27%. Notably, the Asian segment’s sales plunged by 15%, likely due to the demand slowdown in China amid prolonged lockdowns.

• The situation is exacerbated by MPI’s customers adopting a more cautious stance on their investments due to global recessionary fears as soft demand for end-products may cause delays in the introduction of new projects. This is reflected in the Suzhou plant’s low utilisation rate of <60% in 1QFY23, compared to 80% in 2HFY22.

• On a QoQ basis, 1QFY23 core profit declined 34% due to lower sales contribution from the Asian region.

• Other key risks are the strengthening of MYR against US$ and severe talent shortages as well as persistently high inflation.

• Nevertheless, despite the challenges, we expect MPI’s FY23F earnings to be supported by healthy demand from the automotive industry, riding on the electric vehicle wave. The group’s core strength arises from its early move to produce silicon carbide (SiC) and gallium nitrate (GaN) power products which have applications in EV, servers, renewable energy and consumer gadgets.

• From valuation perspective, the stock is trading at a fair valuation of 19x CY23F PE, near its 5-year historical average of 18x while dividend yields are unexciting at 1%.

Source: AmInvest Research - 24 Nov 2022