This article first appeared in The Edge Financial Daily on November 12, 2018
Malaysian Pacific Industries Bhd
(Nov 9, RM11.40)
Maintain buy with an unchanged target price (TP) of RM13.45: Malaysian Pacific Industries Bhd (MPI) reported net profit of RM42.3 million for the first quarter ended Sept 30, 2018 (1QFY19) (up 8.3% quarter-on-quarter [q-o-q]; 16.7% year-on-year [y-o-y]). This came within our and consensus estimates at 26.4% and 28.3% respectively. A first interim dividend of 10 sen per share was declared.
1QFY19’s underlying performance appeared to be intact with revenue in US dollars estimated to be up 1.6% q-o-q and 11.1% y-o-y. While growth on a y-o-y basis was higher than management’s guidance for FY19 at around 5%, note that it was from a low base as the group got off to a slow start in the earlier part of FY18 due to wafer constraints. For the bottom line, net profit growth of 8.3% q-o-q and 16.7% y-o-y was in tandem with revenue growth and aided by sustained strengthening of the US dollar against the ringgit (+3.5% q-o-q; -4% y-o-y), albeit a marginal net foreign exchange gain of around RM300,000 kept earnings before interest, taxes, depreciation and amortisation (Ebitda) margins relatively unchanged at 25.6% (+0.1 percentage point [ppt] q-o-q; -0.6ppt y-o-y).
The group’s balance sheet strengthened further by 12.5% q-o-q and 18.8% y-o-y to RM643.9 million or RM3.07 per share. While undergoing its portfolio transformation strategy, which involves weeding out legacy products with weak margins and focusing on the automotive segment, management in the group’s previous 4QFY18 results briefing guided for an about 5% y-o-y revenue growth in FY19, barring downside risk from global trade tensions, which is closely in line with our forecast of +4.5%. Supporting its targets, the group is an established player within the high-barrier automotive segment which offers steady growth and higher margins. Apart from the automotive segment, traction is also expected for the industrial segment. The group’s sizeable net cash position would be facilitative of potential acquisitions and its strong FCFE, which we have estimated at 81.5 sen per share for FY19, implying a free cash flow-to-equity (FCFE) yield of 7.5% supportive of dividends.
We have maintained our “buy” recommendation on MPI, with an unchanged TP of RM13.45 per share, based on an unchanged enterprise value/Ebitda multiple of six times and calender year 2019 Ebitda. We like MPI for its strategy to focus on higher-margin products in the automotive segment. Key risks include: i) heightening trade tensions between the US and China; and ii) strengthening of the ringgit against the US dollar. — TA Securities, Nov 9