Malaysian Pacific Industries - Recovery Momentum Falls Short

Date: 
2024-02-22
Firm: 
KENANGA
Stock: 
Price Target: 
24.30
Price Call: 
BUY
Last Price: 
30.86
Upside/Downside: 
-6.56 (21.26%)

MPI’s 1HFY24 results disappointed. Its revenue slipped 5% while net profit fell 32% as overheads weighed with floor space remaining largely under-utilised. While its 2QFY24 net profit almost doubled QoQ, the recovery momentum still fell short of expectations. Hence, we cut our FY24F net profit forecast by 26%, reduce our TP by 11% to RM24.30 (fromRM27.20) but maintain our MARKET PERFORM call.

Below expectations. MPI’s 1HFY24 results missed expectations as its core net profit of RM48.7m (-31.5% YoY) made up only 30% and 35% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from elevated operating cost.

Results’ highlights. YoY, MPI's 1HFY24 revenue slipped 5% due to lower Asian order (-21.8%) which constitute c.50% of the group’s revenue. Demand volume from the European (-8.6%) regions weakened but was partially cushioned by a meaningful increase in US orders (+25.9%), which now made up 22% of the group’s revenue (vs. 16.5% in 1HFY22). This underscores the concern of a tepid recovery in demand in Asia, particularly China, on soft demand for consumer electronics owing to cautious consumer spending. Factoring in its expanded floor space and higher operating cost while existing utilisation rate is still below its optimal level, this resulted in 1HFY24 net profit falling at a greater quantum of 31.5%.

Looking at a more favourable perspective on a QoQ basis, its 2QFY24 revenue (+1.9%) was rather flattish but core net profit almost doubled (albeit from a low base). We interpret this as an indication that the group is steadily progressing on its recovery path, although perhaps not at the momentum we had anticipated.

Still in a recovery phase. We are optimistic about the group's sustained recovery momentum, underpinned by its ability to rein in costs (e.g. labour reduction at the Suzhou plant, China) and optimise supply-chain efficiency. That said, it still pales in comparison to its former self during the peak of the recent up-cycle. Additionally, there is concern in the forthcoming quarter, which is expected to be affected by the seasonal Chinese New Year break, leading to scheduled shutdowns within the group.

Forecasts. We cut our FY24F net profit forecast by 26% while maintaining our FY25F numbers.

Valuations. Consequently, we reduce our TP by 11% to RM24.30 (from RM27.20) based on an unchanged CY24F PER of 26x, representing a 10% discount to peers’ forward average PER owing to the group's subdued recovery momentum. Our TP reflects a 5% premium based on a 4-star ESG rating as appraised by us (see Page 4).

Investment case. 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 rather muted in the absence of a significant recovery in chip demand from the consumer electronics sector as well as data centres. Maintain MARKET PERFORM.

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

Source: Kenanga Research - 22 Feb 2024

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