MPI’s 9MFY23 results disappointed as net profit plunged 79% due to sub-optimal plant utilisation owing to the Chinese New Year holidays and higher energy cost. The group expects uninspiring order replenishment from customers amidst macroeconomic uncertainties. We cut our FY23F  and FY24F net profit by 48% and 19%, respectively, but maintain our TP  of RM20.00 as we roll forward our valuation base year to FY24F. Maintain  UNDERPERFORM.

Below expectations. 9MFY23 core net profit of RM53.2m (-78.6% YoY) missed expectations, coming in at only 33% and 30% of our full-year forecast and the full-year consensus estimates, respectively. The variance against our forecast came mainly from an expected loss in 3QFY23 due to low plant utilisation.

Results’ highlights. YoY, 9MFY23 revenue experienced a 13.4% decline primarily due to weaker sales in Asia (-27.6%), offsetting the gains from the USA (2.5%) and Europe (+18.4%). This can largely be attributed to the shorter working days during the quarter due to the Chinese New Year holidays, as well as cautious order replenishment following the reopening of China's borders. Not helping was the higher energy cost which came into effect earlier this year which further increased costs. As a result,  3QFY23 recorded a net loss of RM17.8m which lowered 9MFY23 net profit to RM53.2m (-78.6% YoY).

Impending obstacles. In line with a series of uninspiring tech earnings releases, MPI has also echoed the prevailing challenges associated with escalating energy costs. Not helping, the company faces uninspiring prospects for order replenishment, as customers in China continue to exhibit hesitancy towards committing to larger orders due to the anticipation of forthcoming macroeconomic headwinds. As such, the under-utilisation of its Suzhou plant in China may continue to weigh down on the group’s overall performance.

Forecasts. We cut our FY23F and FY24F net profit by 48% and 19%, respectively.

Investment thesis. We like MPI for: (i)its strong exposure in the growing automotive semiconductor segment, (ii) its venture into promising new technology such as gallium nitride and silicon carbide, and (iii) its superior expertise in power management chip packaging for data centres.  However, its prospects over the medium term will be clouded by slowing consumer electronics and data centres demand, resulting in sub-optimum plant utilisation.

We maintain our TP of RM20.00 on a rolled forward earnings base of FY24F, pegged to an unchanged PER 18x (representing a 20% discount to peer’s forward mean). Our TP includes a +5% adjustment based on a 4- star ESG rating as appraised by us (see Page 4). Maintain  UNDERPERFORM

Risks to our call are: (i) a stronger-than-expected recovery in the global chip sector, (ii) a truce in the Sino-US chip war, and (iii) the USD strengthens.

Source: Kenanga Research - 19 May 2023