CIMB Research upgrades MPI to Buy, higher target price


KUALA LUMPUR: CIMB Equities Research has upgraded Malaysian Pacific Industries (MPI) the stock from Hold to Add with a higher RM9.70 target price due to the higher earnings growth, driven by a recovery in smartphone demand.

It said on Thursday the higher target price was based on a higher 11.7 times CY18F price-to-earnings (P/E), a 10% discount to the sector P/E of 13 times (versus 20% previously) in view of stronger earnings growth projection from FY17 onwards, also supported by higher automotive and industrial sales and favourable currency movement. 

“MPI trades at an attractive eight times CY17F price-to-earnings (P/E) ex-cash, below its three-year historical mean of 11 times. We see weaker smartphone demand and a lower dividend payout as key downside risks,” it added..

In the second quarter ended Dec 31, 2016, its revenue grew by 12.1% on-quarter from RM358mil in 1QFY17 to RM401.4mil due to stronger sales contribution across all key markets and favourable currency movements.

Stripping out the currency impact of 7%, we estimate that MPI’s sales grew by 5% on-quarter, which is better than the flat revenue growth guidance from management. As a result of higher operating leverage, 2QFY17 core net profit surged 55% on-quarte from RM34.6mil to RM53.7mil. 

CIMB Research said 1HFY17 revenue fell marginally by 0.9% on-year due to weak industry demand. 

In spite of the weak demand, group EBITDA margin expanded by 2.7 percentage points on-year to 29.5% due to a better product mix of higher margin packages and lower operating cost. 

MPI's depreciation expenses fell by 12.7% on-year partly due to lower capex requirement. Overall, its core net profit increased 16.6% on-year  to RM88.2mil, after stripping out the forex gain of RM14.7mil, inventory write-offs of RM2.3mil and fair value loss on derivatives of RM5.3mil.

“We raise our FY17-19F EPS by 5%-9% in view of higher profit margin from favourable currency movement. Year-to-date, the US$ has strengthened against the Ringgit by 3% on-quarter. 

“We estimate that for every 1% appreciation of US$ against RM, its FY17 EPS will increase by 1.8%. Management is optimistic that MPI will benefit from moderate industry demand growth in 2HFY17, driven by inventory replenishment on the back of seasonal recovery.

“We like management’s strategy to diversify its exposure and grow the automotive and industrial (A&I)  remains a long-term driver. 

“Total A&I revenue contribution rose from 43% in FY15 to 48% in FY16. Management targets to lift this to about 60% over the next 3%-5% years on growing demand for autonomous cars, adoption of better electronic components and enhanced safety requirements.

“IC Insights projects the automotive and industrial markets for semiconductor to grow at a 2015-2020F CAGR of 4.9% and 4.3%, respectively. Upgrade to Add with a higher RM9.70 target price,” it said.
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