• Still BUY, new MYR38.50 TP from MYR44.80, 48% upside, c.2% yield. Malaysian Pacific Industries is set to be negatively impacted by unfavourable FX movements (revenue base is USD-denominated). Its primary earnings driver (loadings) is set to trend higher into 2H24 and FY25 on upticks in automotive and industrial demand, and new programmes and improvements in the Suzhou plant’s utilisation. Share price weakness presents an attractive risk-reward opportunity to accumulate and ride on the new semiconductor upcycle, and MPI’s China and silicon carbide (SiC) packaging exposure.

• FX impact. MPI sales are mainly denominated in USD terms, but will be partially hedged by its USD purchases that typically make up 40-50% of the COGS. A 1% FX depreciation could result in a c.1-3% impact to bottomline, ceteris paribus. However, the margins compression stemming from the negative FX movements can be passed on to customers through renegotiations, revised quotations, and engineering and process efficiencies. We factored in the stronger MYR/USD to be in line with our in-house FX assumptions of 4.10, 4.20, and 4.20 from 4.30, 4.30, and 4.30 previously, resulting in downward earnings revisions of 14%, 7%, and 4% for FY25F-27F. Our TP is now lowered to MYR38.50 (inclusive of a 2% ESG premium), based on an unchanged 30x FY25F P/E at +1.5SD from its 5-year mean.

• FY24 earnings recap. FY24 revenue of MYR2.1bn (+2.5% YoY) translates into a core PATAMI of MYR182m (excluding the share-based payment for its executive share scheme) met expectations. EBITDA margins improved marginally by 60bps, boosted by favourable FX movements and lower opex. Asia and US revenues were higher 1% and 10%, while Europe sales were flattish. The Suzhou plant continued its profitable trend with better utilisation rates following the upticks in Chinese semiconductor activities. The Ipoh plant saw intermittent slowdowns from automotive clients.

• Optimism ahead. Management is cautiously optimistic for a stronger FY25, fuelled by the recovery of the semiconductor sector. The automotive segment is expected to trend higher in China, cushioning weakness from the Ipoh side, but the industrial segment is expected to continue growing. Consumer electronics should also see upticks, with inventory now at healthy levels. Moreover, the structural growth in SiC and gallium nitride or GaN packaging will continue to drive MPI's long-term growth roadmap, in our view.

• Downside risks: Slower-than-expected orders, loss of a major customer, technology obsolescence, and unfavourable FX.

Source: RHB Research - 9 Oct 2024