Malaysian Pacific Industries
(Oct 27, RM4.99)
Upgrade to buy from neutral with a target price of RM6.34: MPI’s share price has retraced by more than 25% since August, in tandem with the weakness in the local equities market. We think of this as an opportunity to buy on weakness as we continue to see positives in the improving industry outlook.

Sentiment on technology stocks took a sharp turn when US-based Microchip Technology chief executive officer Steve Sanghi cautioned investors against its near-term sales outlook on Oct 9. Since then, MPI’s share price has retraced by more than 25% as investor sentiment was aggravated by renewed concerns over a weaker-than-expected global economic recovery. Nonetheless, we opine Microchip’s lacklustre sales should be treated on a standalone basis as global semiconductor sales continue to show strength as we move into 2015.

The Semiconductor Industry Association announced that worldwide sales of semiconductors hit an all-time high of US$28.4 billion in August, with year-to-date growth registering 10.4%. On the other hand, the book-to-bill ratio for semiconductor equipment moved slightly above parity at 1.04 times as at June. We are expecting the positive momentum to sustain for the rest of the year, driven by an increased appetite for technology devices on the introduction of new flagship models with improved technical specifications.

On the upcoming release of its results for the first quarter of the financial year ending June 2015 (1QFY15), we expect MPI’s quarterly core earnings to register within RM17 million to RM22 million. This would likely be driven by its smartphone segment as management guided that contribution from the sub-segment would likely breach 40% of total sales in FY15 from 34% for FY14.

Following the recent retracement in MPI’s share price, we revise our target price marginally to RM6.34 from RM6.40, a 15.8 times 2015 price-earnings ratio, 40.9% upside, as we update our model for housekeeping purposes following the release of its annual report. — RHB Research Institute, Oct 27.

This article first appeared in The Edge Financial Daily, on October 28, 2014.