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This article first appeared in The Edge Financial Daily, on November 19, 2015.

 

Malaysian-Pacific_FD_19Nov15_theedgemarketsMalaysian Pacific Industries Bhd
(Nov 18, RM7.71)
Maintain buy with a higher target price (TP) of RM9.55:
Malaysian Pacific Industries Bhd (MPI) reported its first quarter ended Sept 30, 2015 (1QFY16) results of RM46.9 million (+36.7% quarter-on-quarter, +135.5% year-on-year). Surprising on the upside, this exceeded ours and consensus estimates at 38.9% and 38.2% respectively. It also declared a single-tier interim dividend of 8 sen per share. Better results were mainly driven by the weaker ringgit and lower tax rates.

The US dollar/ringgit rate increased 10.9% quarter-on-quarter (q-o-q) to RM4.06. Benefiting from this, all of the group’s sales are denominated in US dollars, while only about 30% to 40% of its costs are in US dollars. Against the previous quarter, earnings before interest, taxes, depreciation and amortisation (Ebitda) margins expanded 3.7 percentage points (pps) to 30.5%. Its tax rate also declined 12pps to 6.3%.

In US dollar terms, based on our calculations, revenue declined 6.5% q-o-q within guidance of a 5% q-o-q decline. We believe the weakness was due to continued softness in its industrial segment on the back of high inventory levels.

We revise our US dollar/ringgit rate assumption for FY16/FY17/FY18 to RM4.10, RM4.30, and RM4.30 respectively. We also increase our earnings estimates for FY16/FY17/FY18 by about 25% to 30% to RM151 million, RM180.9 million and RM192.4 million respectively.

The group is currently encountering softness in its industrial and personal computer (PC) segments. This is believed to be a result of previous over optimism in the supply chain, leading to high inventory levels. Dampening top-line growth, we believe these weak conditions may extend into the first half of 2016. Nevertheless, the company is unlikely to feel the full impact of a slowdown, as demand for its core offerings remains strong in the smartphones, automotive and sensor business.

We raise our TP for MPI to RM9.55 per share. We change our valuation methodology to enterprise value (EV)/Ebitda, premised on the high depreciation and amortisation expenses in its business. Our valuation is based on an EV/Ebitda multiple of 4.5 times (within its 5-year historical mean) and calendar year 2016 Ebitda. We maintain our “buy” recommendation on the stock. Discounting seasonal effects, we believe results will remain strong on the back of a weak ringgit and resilient demand within its high-growth product segments. — TA Securities, Nov 18

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