CIMB Research retains Add for MPI, higher target price

KUALA LUMPUR:  CIMB Equities Research is maintaining its Add call for Malaysian Pacific Industries (MPI) with a higher RM13.80 target price. Its last traded price was RM10.80.

It said on Friday this was based on a lower 14.4 times CY20F P/E (vs. 16 times), a 10% discount to target sector P/E in view of cautious demand outlook amid the escalating trade war between US and China. 

“Earnings-accretive acquisitions, ringgit depreciation vs. US$ and higher dividends are potential re-rating catalysts. Meanwhile, wafer supply constraints and a stronger ringgit vs. US$ are key downside risks,” it pointed out.

CIMB Research said in the first quarter ended Sept 30, 2018, MPI's revenue grew 6.7% on-year to RM414mil as higher utilisation more than offset the negative effects of a stronger ringgit vs. US$. 

In US$ terms, MPI’s revenue rose 10.9% on-year, driven by stronger sales from Asia (+18.6% on-year) and Europe (+6.6%), offsetting the sales decline in the US (-6.4% on-year). Core net profit grew by 21.8% on-year to RM44.9m, after stripping out a RM3.5mil provision for inventory write-off. 

MPI also declared a first interim dividend of 10 sen, in line with its expectations.

On a quarter-on-quarter basis, the research house said MPI's revenue increased by 5.3% from RM389mil in 4QFY6/18 to RM414mil in 1QFY6/19 due to higher sales volume and favourable forex following the depreciation of the ringgit against US$ (+3.8% on-quarter). 

In US$ terms, MPI’s revenue rose 1.4% on-quarter, within management’s guidance of 0-5% growth. 

EBITDA margin expanded by 0.6% pt to 26.4% on the back of a better sales mix following its product portfolio transformation initiative. Overall, core net profit rose 12% on-quarter to RM44.9mil

“The group plans to keep the capex level in FY19F similar to FY18’s circa RM170mil as it continues to invest in automation in a bid to boost efficiency. For example, MPI is investing in automated guided vehicles (AGV) in order to help with the packaging and testing processes. The AGVs will replace human beings in the process of placing the wafers into wire bonders and tester equipment.

“We raise our FY19-21F EPS by 2-5% to account for lower depreciation expenses and margin expansion from the portfolio transformation initiative. 

"We expect MPI to deliver a stronger net profit in FY19F, driven by higher utilisation rates on the back of the growing electronics content in the automotive sector and favourable forex movements,” it said.


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