MPI - Weak outlook ahead

We attended the company’s 1Q13 post-result briefing yesterday and came back with the view that the company’s outlook continues to remain challenging due to the weakness in the global economy and the slower growth in the PC market. We also see the industry’s prospect being hampered by a potential slowdown in the demand of smartphones and tablets should the weak global economic conditions persist. Management is guiding for a flat QoQ revenue growth in 2Q13. However, it is believed that there could be a recovery in 2H13. For now, we maintaining our revised earnings estimates (which were downgraded yesterday) for FY13E (RM14.7m) and FY14E (RM31.0m). Our MPI’s TP is maintained at RM2.78 based on a targeted FY13E PBV of 0.85x (-1.5 SD below its historical 3-year mean). We are also keeping our MARKET PERFORM rating on the stock.

Summary of 1Q13 results. MPI recorded a decrease in its 1Q13 earnings by 98.9% on a QoQ basis to just RM0.1m (vs. RM13.5m in 4Q12) due mainly to the soft demand in its leadframe business and a tax adjustment of –RM1.6m (vs. RM7.5m in 4Q12). Margin-wise, its EBIT margin decreased 1.3% QoQ (vs. 2.4% in 4Q12) due to higher operating expenses from the ramp-up of its Suzhou’s operation. 

Expecting a flat QoQ revenue growth in 2Q13. Management expects flattish revenue in 2Q13 as the overall market sentiment is still seen as very weak. However, the management is expecting a potential recovery in 2H13, likely to be driven by its increasingly strong position in its new products such as MLP/QFN package. Note that MLP/QFN package is widely installed in smartphone and tablet products, which are mainly dominant by Apple and Samsung products.

Weak outlook going forward.  Together with the weak and uncertain global economic conditions, we are of the view that there will be a continued slowdown in the traditional PC segment as some consumers have shifted their demands to smartphones and tablets. However, even the growth of smartphones and tablets may also see a slowdown as well from its rapid growth pace in the past few years if the  current weak global economic conditions persist. All in all, the earnings and growth visibility of the industry will continue to be affected as the demand for all segments of the industry is now seen as weaker and uncertain. This will pose a higher risk for semiconductor companies’ outlook and earnings over the next few quarters.  

Potential higher commodity prices.  Traditionally, MPI has been using gold as one of its major raw materials in its packages. However, gold price has increased significantly and affected the cost of its products. Hence, the company has tried to shift its raw material usage from gold to copper as the latter is inexpensive compared to gold. Customers tend to choose gold compared to copper as gold is a good conductor compared to copper. Alternately, the company has ventured into other high-margin products, which have smaller packages size and thus could reduce the cost of the products.    

Source: Kenanga