Despite seeing earnings recovery in 1QFY25, management remains cautious about the near-term outlook, as the automotive and consumer segments continue to be challenging. Nevertheless, management revealed that AI server packages could emerge as a new revenue growth driver, thanks to the robust demand for generative artificial intelligence. On the other hand, the group plans to invest an additional RM200mn in upgrading and expanding capacity in China. Meanwhile, the group will continue to invest in new technologies to capitalise on the next wave of opportunities. We take this opportunity to revise the target PE multiple for MPI from 32x to 30x to account for the potential further slowdown in the global automotive market. Accordingly, we tweaked the target price from RM38.20 to RM35.80. Maintain Buy.

The following are the key takeaways from the 1QFY25 analyst briefing:

Slowdown in Automotive Segment Partly Offset by Strong Growth in AI Server Packages

Management guided that Europe and the USA are still experiencing significant challenges, particularly in the automotive and consumer electronics sectors, due to a combination of demand fluctuations, supply chain constraints, and pricing pressures. This was evidenced by the revenue breakdown in 1QFY25, where the automotive segment accounted for 36.0%, compared to 43.0% a year ago. Nevertheless, the decline in the automotive segment was partly offset by solid growth in the AI server packages, which contributed 8.0% of total revenue, up from nearly zero a year ago. Moving forward, management believes the AI server packages could be a strong earnings driver, underpinned by robust demand for generative artificial intelligence.

Cautious Outlook on the China Market

Management revealed that the China market is currently very challenging due to overcapacity issues. Nevertheless, management emphasised that the group would not engage in the price war but instead focus on safeguarding its bottom line and margins. Despite increasing competition, Suzhou's operations in China remain profitable, with a current utilisation rate of around 78.0%. Moving forward, the group plans to invest an additional RM200.0mn for upgrading and capacity expansion in China, as management firmly believes the long-term outlook for the semiconductor sector in China remains bright.

Remain Committed to Investing in the Latest Technologies

Management has reaffirmed its commitment to investing in new technologies to capitalise on the next wave of opportunities. With a robust net cash position of about RM1.0bn, the group will continue to focus on investments in electric vehicles, silicon carbide and gallium nitride technologies, advanced packaging, power packaging, 5G testing, and sensors, among other areas. Meanwhile, the group is also actively pursuing merger and acquisition opportunities.

Impact

Maintain FY25 to FY27 earnings forecasts.

Valuation & Recommendation

We take this opportunity to revise the target PE multiple for MPI from 32x to 30x to account for the potential further slowdown in the global automotive market. Accordingly, we tweaked the target price from RM38.20 to RM35.80, based on a PE multiple of 30.0x CY25F EPS and a 3% ESG premium. Maintain a Buy call on the stock. Key downside risks include weaker-than-expected loadings, geopolitical tensions weighing on economic growth and disrupting supply chains, a strengthening of the Ringgit against the USD, and a sudden surge in commodity prices.

Source: TA Research - 27 Nov 2024