While MPI's 1QFY25 results came in below expectations and near-term operating environment may be impacted by geopolitical instability and currency fluctuations, the ongoing recovery in the semiconductor sector and strong demand for chips in renewable energy, electric vehicles, and AI sectors are set to fuel robust growth prospects. Post results review, we have revised our FY25-26F earnings lower by 11-10%, respectively.

Correspondingly, our target price has been adjusted to RM34.90, but we maintain its OUTPERFORM rating.

MPI's 1QFY25 net profit of RM30m (+82%) missed expectations, accounting for 13% of our forecast and 14% of the street's full-year estimate. The key variance was mainly due to lower-than-expected turnover and margins.

YoY, MPI's revenue grew by nearly 1%, driven by strong contributions from Asia and Europe, which saw 8% growth and accounted for 53% and 30% of total revenue, respectively. However, this was offset by a 23% decline in sales from the USA region, which fell to RM92m. PBT rose by 15%, supported by higher revenue and lower operating expenses, though the weaker foreign exchange rate partially offset the gains.

QoQ, its turnover decreased by 3%, with all key regions-Asia, USA, and Europe-reporting lower sales. Despite this, PBT dipped 65% to RM40m, largely due to the reversal of a RM74m executive share scheme provision in the previous quarter. Notably, we have always treated share-based payment provisions as ongoing cost item and have not excluded them from our calculations, so no adjustment has been made to our core net profit.

Outlook. Looking ahead, MPI anticipates a challenging operating environment due to geopolitical instability, currency fluctuations, and inflationary pressures. The group will prioritise cost optimisation through automation and process improvements, while refining its strategy to capitalise on growing chip demand in the renewable energy, electric vehicle, and AI sectors. Additionally, the cessation of Dynacraft's loss- making leadframe business is expected to improve margins and bottom line. We anticipate strong growth in mid-to-high power technology, particularly in silicon carbide (SiC) and gallium nitride (GaN) packaging, driven by rising demand in the automotive and renewable energy sectors.

Forecasts. We trim our FY25-26F numbers by 11-10%, respectively, after revising our turnover and margin assumptions.

Valuations. We lowered our TP by 10% to RM34.90 (fromRM38.80) based on an unchanged targeted CY25 PER of 29x, in line with peers' forward PERs. Our TP reflects a 5% premium based on a 4-star ESG rating as appraised by us (see Page 4).

Investment case. We continue to like MPI for: (i) its strong presence 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. Maintained OUTPERFORM.

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

Source: Kenanga Research - 26 Nov 2024