Malaysian Pacific Industries Bhd
(Jan 23, RM5.76)
Upgrade to buy with a higher target price (TP) of RM6.40 from RM5.45: Earnings for first half of financial year 2015 (1HFY15) accounted for 55% to 60% of our previous and consensus’ full-year forecasts. 

Despite the seasonally slower quarter-on-quarter (q-o-q), revenue growth still beat expectations at an increase of 3% in the second quarter of financial year 2015 (2QFY15), helped by strong contribution from Chinese smartphone makers which partly offset the weaker industrial segment, and a stronger US dollar compared to ringgit (US dollar revenue fell 2% q-o-q).

Along with lower commodity prices (specifically copper), these lifted 2QFY15 margins to 10.5% (1QFY15: 8.3%).

MPI is guiding for a modest seasonal softening in 3QFY15 (slower China operation due to Chinese New Year holidays), though we think the strong US dollar might again help to sustain decent revenue growth. 

MPI has ramped up FY15 capital expenditure (capex) for its three key segments (micro leadframe package or MLP, tests, and high density leaded), and also for expanding its packaging capabilities into land grid array and wafer level chip scale packages (WLCSP).

We raise FY15 to FY17 forecast earnings per share (EPS) by 36% to 50% after imputing a weaker ringgit (3.45 to 3.60 per US dollar in FY15 to FY17F compared with 3.20 previously).

MPI’s sales are mainly in US dollars, while only 50% to 60% of costs are in US dollars. The company’s policy is to hedge 50% of its net US dollar exposure.

We now peg our valuation for MPI to 1.4 times calendar year 2015 book value (rolled over from FY15) to derive a TP of RM6.40 (with 15% return on equity). 

This is consistent with global peers’ valuations in the outsourced assembly and test (OSAT industry). — AllianceDBS Research Sdn Bhd, Jan 23

This article first appeared in The Edge Financial Daily, on January 26, 2015.