This article first appeared in The Edge Financial Daily on August 30, 2019 - September 5, 2019

Malaysian Pacific Industries Bhd
(Aug 29, RM8.44)
Maintain outperform with an unchanged target price (TP) of RM12.10: Malaysian Pacific Industries Bhd’s (MPI) fourth quarter of financial year 2019 (4QFY19) core net profit (CNP) came in within expectations at RM30.1 million (-23% year-on-year [y-o-y]; +79% quarter-on-quarter [q-o-q]), bringing FY19 CNP to RM128 million (-10% y-o-y). The full-year CNP made up 96% of consensus estimate and 102% of ours. The group’s net cash position further strengthened to RM713 million from RM689 million in 3QFY19. As usual, no dividend was declared during the quarter.

Y-o-y, FY19 CNP fell 10% on a 4% revenue dip, led by the US with a 20% decline amid the trade war, but largely offset by 2% growth from Asia. Meanwhile, the quicker pace of decline in CNP is explained by the RM17 million foreign exchange (forex) loss (versus RM15 million forex gain in FY18) and higher contribution from the group’s 70%-owned subsidiary Carsem (M) Sdn Bhd, which resulted in a higher minority interest.

Q-o-q, CNP soared 79% as revenue climbed 5%. While we have yet to obtain a detailed industry breakdown, we believe the revenue growth was underpinned by higher smartphone sales from several new model launches towards end-3QFY19, which likely boosted the demand for the group’s Quad Flat No-leads packages and at the same time, Dynacraft’s lead frames. The larger increase at the bottom line is explained by a notable four-percentage point expansion in gross profit margin to 16%, likely due to higher capacity utilisation.

The group has embarked on a portfolio rationalisation exercise that entails weeding out low-margin products, while switching focus to automotive sensors, including microelectromechanical systems and packages used in data servers such as Cu-clip packages for power management chips. The said segments are likely to offer decent growth prospects given the rising semiconductor content in automobiles and increasing data needs. In addition, the automotive space is likely to offer higher margins as cars are bigger ticket items, and the segment has a higher barrier to entry due to long and strict qualification processes.

We fine-tune our FY20 estimate (FY20E) CNP by 1% to RM161 million due to housekeeping reasons and we introduce our FY21E CNP of RM168 million.

We maintain “outperform” with an unchanged TP of RM12.10 based on 2020 calendar year estimate price earnings ratio (PER) of 14 times, reflecting the group’s mid-cycle valuation. We still like MPI for its long-term mission to transform its portfolio into an automotive-centric one, a space which offers brighter growth prospects due to the rising semiconductor content in automobiles. In addition, the stock is currently a deep bargain with ex-cash PER of 5.6 times after considering its net cash position of RM713 million as of 4QFY19. Risks to our call are weaker-than-expected sales and margins, and unfavourable currency exchange rates. — Kenanga Research, Aug 29