• BUY, new MYR33.60 TP from MYR36.20, 21.7% upside, c.1% yield. 1QFY23 (Jun) PATAMI of MYR49.7m missed expectations on lower-than- expected margins and topline – dragged down by the lower utilisation rate at the Suzhou plant and higher fixed costs. Our earnings and TP are cut accordingly to account for prolonged lacklustre demand in the consumer electronic space. Nonetheless, with the share price consolidating to the current 17x FY24F P/E, we like Malaysian Pacific Industries’ exposure to the structural demand upsurge in the automotive segment in the mid-term.

• Below expectations. 1QFY22 revenue of MYR564.0m (-7.8% QoQ, -3.5% YoY) and core PATAMI of MYR49.7m only account for 14.6% and 14.7% of our and consensus’ full-year forecasts. EBITDA margin contracted by 3pts YoY to 26.9% amid low utilisation at the Suzhou plant, higher depreciation charges, and electricity and staff costs. Coupled with lower revenue, these contributed to the weaker performance YoY. Geographically, sales in Asia were down by 15% YoY, partially cushioned by stronger US (+7%) and Europe segments (+25%). MPI declared a first interim dividend of 10 sen/share (flat YoY), going ex on 7 Dec.

• Softening demand may persist. While 1Q is seasonally weak for MPI, demand in the consumer electronic markets is likely to remain soft for the coming quarter, in our view, affecting the utilisation rate at the Suzhou facility. Conversely, demand at M-Site and S-Site remains healthy, with challenges on manpower and material shortages. We expect the new M- Site (+70k sq ft floor space) and additional 35k sq ft space at S-Site to cushion the weakness from the Suzhou plant once they start contributing in 2HFY23, given the relatively solid demand for micro-electromechanical systems or MEMS sensors and automotive products.

• Forecasts. We cut our FY23F earnings by 13.5% but leave FY24F-25F numbers relatively unchanged after factoring in lower margin assumptions and slower topline growth. Consequently, TP is now lowered to MYR33.60 based on an unchanged 21x CY23F P/E, in line with peers and KLTEC’s mean. Our TP includes a 2% ESG premium based on our proprietary methodology. We like MPI as it stands to benefit from its expansion plan, China’s localisation efforts, and advanced packaging technology, ie the power module in silicon carbide packaging and gallium nitride for the automotive electrification space.

• Key downside risks. Slower-than-expected orders, material shortages, and unfavourable FX movements.

Source: RHB Research - 24 Nov 2022