This article first appeared in The Edge Financial Daily on May 22, 2018

Malaysian Pacific Industries Bhd
(May 21, RM8.66)
Upgraded to buy with a fair value (FV) of RM9.79: We upgrade our recommendation to “buy” from “hold” on Malaysian Pacific Industries (MPI), as value has emerged following a steep fall in its share price in the recent months. The company now offers a total return of 19% from its current price. Our unchanged fair value of RM9.79 per share is pegged at a financial year 2019 price-earnings of 12 times, in line with its three-year historical average.

We came away from MPI’s third quarter in the financial year ended 2018 (3QFY18) analyst briefing giving reassurance that earnings will be stronger sequentially, given the ease of wafer supply constraints. In addition, management anticipates to deliver more flip-chip packaging for power management components in cryptocurrency mining machines. While the impact on earnings is unquantifiable at this juncture, we believe the business would offer handsome margins given its niche.

Currently, the group’s focus remains on improving its bottom line by weeding out low-margin client. The freed up capacity will be replaced with high-margin and high-growth businesses. These include Cu-clip packaging for power chips, micro-electro-mechanical systems (MEMS) for smartphones and automotive sensors, and transient voltage suppressors (TVS) for protection against damaging surges, voltage irregularities and electrostatic discharge.

Furthermore, MPI is embracing the revolution of 4.0 Industry within its manufacturing facilities. By second half calendar year of 2019 (2HCY19), the group aims to achieve full automation in its manufacturing line of MEMS sensor. This would bring about better quality, accuracy and cost savings.

As of 31 March 2018, MPI’s net cash position had strengthened to RM554 million. Management has reaffirmed that the group is eyeing for merger and acquisitions (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 derived from the automotive segment. Currently, the automotive segment represents 25% of total group revenue, while the largest segment at 40% comes from smartphones.

We like MPI because of its: 1) new product portfolio that focuses on higher-margin specialised market; 2) leading position in ultra-thin micro leadframe packaging (MLP) and increased research and developments (R&D) in the MEMS space to ride on the Internet of Things (IoT) wave, particularly perceptible in the automotive and industrial segments; and 3) strong net cash position which allows it to look into meaningful M&A.

Overall, we believe MPI’s promising long-term prospects coupled with the recent steep fall in share price signalled a buying opportunity. MPI is currently trading at a calendar year 2018 forecast price earnings (CY18F PE) of 11 times, representing 15% discount to the average semiconductor manufacturing sector PE of 13 times. — AmInvestment Bank, May 21