M’sian Pacific Industries - Cautious outlook still for 1H2013

We came away from the group’s 2QFY13 post-result briefing with our cautious view unchanged. The weak market sentiment and pallid PC sales amid the prolonged global economic uncertainties remained a drag on the industry. Management itself is of the view that any lights at the end of the tunnel could only be seen earliest only in 2H2013, a view that we share as well. It however clarified that the recent minimum wage policy would not have a material impact on the earnings as the company’s labour cost had only increased by c.RM160k as of end-Jan 2013. We have meanwhile lowered our FY13 earnings estimate by 47.6% to RM7.7m after imputing in the assumption of higher commodity prices ahead for the year. However, our FY14 and FY15 earnings estimates are unchanged. To align with our conservative stance, we have also ascribed a lower targeted FYE14 PBV of 0.78 (-1.0 SD below its historical 3-year mean) from 0.85x previously on our MPI’s valuation. This has led to our new lower MPI’s target price of RM2.59 (from RM2.78 previously). Maintain MARKET PERFORM.

Snapshot of 2QFY13 results. MPI recorded losses of RM1.8m in 2QFY13, dragging its 1HFY13 earnings back into the red with a net loss of RM1.6m. The main culprits were the prolonged soft demand in its leadframe business coupled with a tax adjustment of –RM1.6m in 2Q13. In terms of its revenue breakdown, the smartphones and tablets segment continued to be the largest contributor, accounting for c.33% of the group’s total revenue as of 1HFY13. 

Expecting a strong growth potential in 4QFY13 and beyond. While management expects another subdued 3QFY13, which could come in broadly similar to the 2QFY13 performance in light of the prolonged weak market sentiment, it however sees a strong recovery from 4QFY13 onwards due to its increasingly strong position in new products such as micro leadframe package (MLP) and its turnkey test business.  

The impact of minimum wage policy is minimal.  On the labour cost issue, management has downplayed the impact of the minimum wage policy on its earnings as most of its workers’ salaries are higher than the indicative minimum wage of RM900. The group also indicated that its labour cost, which accounted for about 23% of its total operating cost, has only increased by c.RM160k as of end-Jan 2013.

Capex guidance lowered to c.RM170m from c.RM200m previously. The group’s capex has been pulled back significantly to only c.RM19.3m in 2QFY13 as compared to c.RM63.3m in 1QFY13. We understand that this was in line with management’s long term view to keep its capex lower than its EBITDA level. On a full year basis, management has now guided for a lower capex of RM170m-180m for FY13. We have thus lowered our FY13 capex assumption to RM180m from RM212m previously.

Our take post the results briefing.  While we are sanguine on the increasingly strong position of the group’s new products, any lights at the end of the tunnel could only be seen earliest in 2HCY13 as we believe the prolonged weak market sentiment and order visibility could continue to weigh on the industry’s prospect at this juncture. To reflect our conservative stance, we have slashed our FY13 earnings estimate by 47.6% to RM7.7m after imputing in the assumption of higher commodity prices ahead for the year. However, our FY14 and FY15 earnings estimates are unchanged. We have also slashed our FY13 DPS assumption to 10 sen (from 20 sen previously) after our earnings revision above.

Source: Kenanga