Biting the bullet
- 1H22 core net profit fell below our expectations at 43% of FY22F forecast due to weaker equipment sales but broadly in line with consensus at 51%.
- We cut our FY22-24F EPS by 8-15% to account for weaker semis equipment outlook in view of sluggish smartphone and mobile devices demand.
- We downgrade the stock from an Add to Hold with a lower RM1.60 TP.
Sequential jump in 2Q22 core net profit aided by forex gain
Revenue in 2Q22 grew by 5% qoq to RM94m, driven by sales contribution from the semiconductor material business unit (SMBU), which rose 18% qoq on higher average selling prices (ASP) and shipment volume. However, this was partially offset by lower sales volume from the semiconductor equipment business unit (SEBU) due to cautious capex spending and weaker demand from the smartphone and mobile device segments. Nevertheless, Mi’s pretax profit margin expanded by 6.5% pts qoq to 22.1% mainly due to the strengthening of US$ against ringgit and NTD. Overall, Mi Technovation’s core net profit in 2Q22 rose 40% qoq to RM20m (vs. RM14m in 1Q22). Meanwhile, for the six-month period, core net profit slid 19% yoy to RM34m due to weaker equipment demand.
Challenging outlook in 2H22F; revising down EPS by 8-15%
The group sees a challenging outlook for SEBU in 2H22F due to cautious equipment spending from its customers amidst uncertainty brought about by multiple headwinds, such as the ongoing Russia-Ukraine conflict, China’s strict pandemic control measures, supply chain constraints and inflationary cost pressures. While customers have not cancelled their orders, the shipment dates for these machines remain unclear depending on whether demand picks up by 4Q22F. Meanwhile, the group still projects robust demand in SMBU, driven by secular growth drivers such as high-performance computing (HPC), 5G mobile and network deployment and Internet-of-Things (IoT). Overall, we cut our FY22-24F EPS by 8-15% on lower equipment demand and delay in Ningbo plant rollout.
Setting its sights on the second phase of its 10-year roadmap
The group plans to set up its third and fourth business units under the second phase of its 10-year roadmap (2019-2028F) as part of its expansion plan to become a semiconductor and commercial solutions provider. For its upcoming third business unit, the group aims to develop a new advanced packaging technology platform and manufacturing processes, leveraging its expertise in the semi equipment and material businesses. Meanwhile, on the fourth business unit, the group is looking at commercial electronics product development for household items with increasing technology content and features.
Downgrade from an Add to Hold with a lower RM1.60 TP
We downgrade the stock from an Add to Hold with a lower RM1.60 TP, based on 16x CY23F P/E (21x previously), now 1.5 s.d. below the Malaysian automated test equipment (ATE) sector’s 5-year mean P/E of 30x to reflect weaker sentiment in the tech sector, especially for companies with higher exposure in the mobile segment