Malaysian Pacific Industries - Bottoming Out; Upgrade to BUY

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-0.86 (2.79%)
  • Upgrade to BUY from Neutral, new MYR30 TP from MYR28.80, 15% upside, c.2% FY24F (Jun) yield. 1HFY24 core profit of MYR72.9m (-13.3% YoY) beat our expectations on higher-than-expected EBITDA margins and interest income. We remain hopeful for a better utilisation rate – especially in China – and the strong product pipeline in various segment to ride on the semiconductor recovery. While the near-term recovery may be uneven across segments, the trajectory of Malaysian Pacific Industries’ earnings cycle has bottomed out following a better showing in 2QFY24.
  • Above expectations. 1HFY24 revenue of MYR1.04bn (-5% YoY) translated into a core PATAMI of MYR72.9m – at 60.7% and 52.6% of our and consensus’ full-year forecasts. EBITDA margins improved 30bps YoY to 25.2%, boosted by favourable FX movements despite being dragged by PPE impairments amounting to MYR8.9m. Revenue for Asia and Europe fell 12% and 8% YoY, partially cushioned by better US sales (+26% YoY).
  • Better sequentially. While 2QFY24 revenue was flattish (+1.9% QoQ, -0.7% YoY), core PATAMI improved by 88.5% QoQ (+38.7% YoY) to MYR47.6m. This was mainly supported by stronger interest and other operating income, and lower tax expenses. At EBITDA level, there was an 8.2% QoQ improvement, mainly on stronger USD and better cost controls. Note: We adjusted for PPE impairments, FX losses/gains, and fair value losses/gains on derivatives to arrive at our core profit.
  • Semiconductor demand remains uncertain in the near term. While 1HFY is usually seasonal stronger, the semiconductor sector is bottoming out as a whole, and demand is likely to pick up gradually from here. Recovery in Carsem Suzhou was supported by the semiconductor recovery in China – especially in the automotive and renewables segments – while servers and smartphone markets remain in the doldrums. Certain push outs of new product introductions and wafer shortages also undermined the overall recovery path. MPI previously guided for breakeven in Suzhou by 4QFY24.
  • Forecasts and rating. We raise our FY24F earnings by 14.3% but keep our FY25 and FY26 forecasts unchanged following the revisions to our interest income, margin, and tax assumptions. Consequently, our TP is lifted to MYR30 from MYR28.80 (inclusive of a 2% ESG premium) based on an unchanged 27x P/E, ie at +1.5SD from its 5-year mean. We like MPI for its various expansion plans in both Ipoh and China, which is set to propel growth. This is on the gradual recovery of the semiconductors sector as well as riding on the proliferation of silicon carbide and gallium nitride packaging.
  • Downside risks: Slower-than-expected orders, loss of major customer, technology obsolescence, and unfavourable FX.

Source: RHB Research - 22 Feb 2024

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