This article first appeared in The Edge Financial Daily on August 28, 2018

Malaysian Pacific Industries Bhd
(Aug 27, RM11.98)
Maintain buy with an unchanged fair value of RM13.79: Our valuation is based on an unchanged calendar year 2019 (CY19) price-earnings ratio of 14 times.

We came away from Malaysian Pacific Industries Bhd’s (MPI) fourth financial quarter ended June 30, 2018 (4QFY18) briefing reassured that earnings will be favourable going forward.

The group’s portfolio-rationalisation exercise during the year (when low-margin customers were weeded out to focus resources on higher-margin businesses) proved to be effective.

MPI’s 4QFY18 earnings before interest and tax margin improved 1.3 percentage points quarter-on-quarter (q-o-q), while revenue in US dollars jumped 11% year-on-year and 7% q-o-q after taking on new jobs.

Moving into FY19, management anticipates to deliver more flip chip packaging for power management components. These power chips are used in server farms that run 24/7, such as cloud storage and media streaming databases.

While the impact on earnings is unquantifiable at this juncture, we believe the business would offer handsome margins given its niche. In addition, the general trend of moving towards cloud computing bodes well for MPI’s expertise in power chips.

Furthermore, MPI is embracing the revolution of Industry 4.0 for its manufacturing facilities. The group aims to achieve full automation of its manufacturing line of microelectromechanical systems (MEMS) sensors by the second half of CY19.

This would bring about better quality, accuracy and cost savings. Currently, the group has a pilot line in its facility, where it is working on replacing human line operators with automated guided vehicles.

In regard to MPI’s strong net cash position, management has reaffirmed that the group is eyeing merger and acquisition (M&A) opportunities in new technologies, particularly in the automotive space.

This comes in line with the group’s five-year plan of achieving 50% of its revenue being derived from the automotive segment.

Currently, the automotive segment represents 28% of total group revenue, while smartphones are the largest segment at 35%.

We continue to like MPI because of its new product portfolio that focuses on higher-margin specialised markets; its leading position in ultra-thin micro leadframe packaging and increased research and development in the MEMS space to ride on the Internet of Things wave, particularly perceptible in the automotive and industrial segments; and its strong net cash position, which allows it to look into meaningful M&A. — AmInvestment Bank, Aug 27