• Keep BUY, with new MYR36.20 TP from MYR44.40, 34% upside. We factor in the semiconductor market slowdown, global growth challenges, and our in- house bond yield expectation and FX assumptions, resulting in lower earnings forecasts and TP. The short-term weakness in China should be cushioned by healthy loading at its Ipoh plant and favourable FX. We continue to like Malaysian Pacific Industries’ exposure to the automotive space, and medium- term structural growth trajectory in advance packaging technology ie the power module in silicon carbide packaging and gallium nitride.

• FY22 (Jun) earnings recap. FY22 saw another historic high, with a record revenue of MYR2.4bn (+21.5%) and core PATAMI of MYR318.1m (+23%) – met expectations. The stronger bottomline was supported by higher demand across all products segments and margin expansion, despite the higher effective tax rate as certain mature packages were not exempted for tax. Both higher operating leverage and favourable FX contributed to EBITDA margin improving to 30% (FY21: 27.4%) level.

• Slowdown in China. In line with the overall weakness in demand for consumer electronics, amid the prolonged lockdown situation in China and overall high inflationary pressures, its utilisation rate at the Suzhou plant dropped to below 60% in 1QFY23 amid seasonal weakness – exacerbated by the slowdown in demand for legacy packaging and material shortages, along with inventory corrections in the consumer electronics space.

• Outlook. Despite inflation challenges, and manpower and material shortages, FY23F earnings are expected to be sustained by healthy demand in the automotive and power management ICs segments, including silicon carbide packaging, as well as the stronger USD trend, which is expected to boost MPI’s margin. The weaknesses in China will likely be cushioned by the strong loading in Carsem, Ipoh. Also, the new M-Site (+70k sq ft floor space) should start production by early 2023, along with the additional 35k sq ft space at the S-Site by 2H22 to cater for micro-electro-mechanical systems (MEMS) sensors and automotive products.

• Forecasts and ratings. We tweak FY23F-24F by -7.1% and -14.9% as we factor in lower volume loading in line with the broader slowdown of the semiconductor market and the new USD/MYR FX assumptions of 4.652 for CY23. We also lower the CY23F target P/E to 21x from 25x (at +0.5x from its 5-year mean and in line with KLTEC’s 5-year mean), in line with the sector revision, attributable to the continued hawkish tone of the US Federal Reserve that is a factor in the increasing bond yield, which will continue to dampen the equity valuation and risk of earnings derail on the uncertainties in the world economy. Note that our new TP of MYR36.20 includes a 2% ESG premium based on our proprietary methodology.

• Downside risks: Slower-than-expected orders, material shortages, and unfavourable FX movements.

Source: RHB Research - 12 Oct 2022