MPI shows decent results on better balance sheet

by **Cals** Wed 29 Jan 2014, 10:04

Business & Markets 2014

Written by Alliance Research

Wednesday, 29 January 2014 09:36

Malaysian Pacific Industries Bhd
(Jan 28, RM3.94)
Maintain buy at RM3.91 with a revised target price of RM4.59 from RM3.83 previously: MPI’s net profit for the first half of financial year 2014 ending June (1HFY14) of RM25.9 million came in within expectations, accounting for 53% of our and 54% of consensus full year forecasts. While 2HFY14 results could be better due to potential new design wins (micro-electro-mechanical systems products for the automotive market) and a stronger US dollar/ringgit exchange rate. This would be offset by the disposal of its stamp lead frame business and higher electricity tariff by the third quarter (3Q) of FY14.

MPI was still able to record a decent 1H profit despite making a RM8 million provision for the disposal of its stamp lead frame business. We understand from management previously that this is partly due to the significant increase in sales as its clients built up their inventory ahead of the closure. As a result, this has made its usual loss-making subsidiary, Dynacraft, profitable in 1H.

Overall, MPI recorded a 5.4% year-on-year increase in revenue for 1HFY14 as sales from all segments were higher with Asia increasing by 3%, the US by 6% and Europe by 10% against last year’s corresponding period.

The greenback strengthened against the ringgit by 2.8% quarter-on-quarter on average in 3Q.

Based on our estimates, MPI has only spent about RM12 million capital expenditure (capex) in 2Q, relatively unchanged from its 1Q capex of RM11.8 million. We do not expect MPI to have any significant ramp-up in capex within the next two quarters (notwithstanding its RM150 million budget for capex in FY14).

This, coupled with its strong operating cash flow, has led to an increase in its cash position to RM75.1 million while its borrowings have decreased by 29% to RM130.6 million (as at Dec 31, 2013). Net gearing ratio currently stands at 0.07 times only.

We make no change to our earnings forecasts for now, barring any new updates from an analyst briefing this week.

Given the decent results and improving balance sheet, we now peg our valuation for MPI to calendar year 2014 (CY14) price-to-book value (P/BV) of 1.2 times, in line with its historical average. This raises our target price to RM4.59 (from RM3.83 previously). We maintain our “buy” call.

Our target valuation of CY14 P/BV of 1.2 times (with 8% return on equity) is slightly at a premium to global comparable peers’ valuations, but we believe this is justified given MPI’s much lower net gearing level and potential for dividend upside

Investment risks include: (i) slower than expected global economic growth; (ii) weakening of the US dollar; (iii) rising cost of raw materials; and (iv) overcapacity. — Alliance Research, Jan 28

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This article first appeared in The Edge Financial Daily, on January 29, 2014.