Investment Highlights

• We upgrade Malaysian Pacific Industries (MPI) to BUY from HOLD on a higher fair value of RM40.34/share (from RM23.40/share previously), pegged to CY25F PE of 30x, which is 2 standard deviation above its 5-year average of 18x, given the anticipation of demand recovery for semiconductors. We continue to ascribe a neutral ESG rating of 3 stars.

• Our forecast earnings are maintained as we deem MPI’s results as largely within expectations, even though 9MFY24 net profit of RM81mil only accounts for 66% of our FY24F earnings and 61% of consensus. We anticipate a substantively stronger 4QFY24 earnings delivery, riding on the tech-driven recovery cycle, to meet our projection.

• YoY, the group’s 9MFY24 net profit improved by 53% YoY due to lower operating costs as EBITDA margin improved by 1.2%-points YoY to 23.2% coupled with higher interest income. We believe this stemmed from better production yield and reduced fixed expenses from the China plant.

• QoQ, 3QFY24 net profit increased marginally by 2% due to slightly better sales growth from Asia (+2% QoQ) and Europe (+5% QoQ) coupled with higher interest income.

• In the near term, we expect gradual demand recovery in consumer electronics as global inventory is depleting. However, ongoing geopolitical tensions and persistently high interest rates in developed countries are likely to constrain consumer spending.

• In the longer term, we expect a recovery in MPI’s earnings, driven by:
  
  (i) new customers in the automotive segment, underpinned by growing demand of electronic vehicles,
  
  (ii) customers continuing to increase capital expenditure to expand chip-making production capacity, and
  
  (iii)increasing contribution from the industrial segment with a surge in data centres and need for more servers.

• From a valuation perspective, the stock is currently trading at a decent valuation of 24.9x CY25F PE vs. its 5- year peak of over 50x.

Source: AmInvest Research - 17 May 2024