KIM ENG RESEARCH, Jan 11

MFS recently guided that 1QFY06 would surpass 4QFY04, its record quarter with net earnings of $13.6 million. We expect the company to report net profit of $13.9 million when it releases results on Jan 17. This would translate into 19 per cent year-on-year and 65 per cent quarter-on-quarter earnings growth.

We expect the better showing to stem from a combination of solid handset demand, significantly lower tax rate and a turnaround of its China plant, which lost $1.8 million in FY05.

In line with strong holiday sales for Motorola phones and the steady rollout of new models, we believe the growth in handsets would be significant and new programmes would lift profit margin. Order backlog should remain strong at about S$160 million.

In other areas of business, we believe the company should see stable growth in shipment of handset display panels to Philips Mobile Display System while flex for DVD RW pick-up to Philips Optical Storage should experience seasonal strength in the December quarter.

Separately, MFS announced that it has been granted a five-year Development and Expansion Incentive tax concession from the EDB. Coupled with a tax holiday for its operation in China, we estimate the company's effective tax rate would fall further from 16.6 per cent in FY05 to an average of 12.5 per cent in FY06.

Due to stronger than expected profitability and higher revenue growth, we are raising FY06 and FY07 earnings forecast by 21 per cent to $51.1 million and $60.2 million respectively.

Consequently, we have raised our target price to $1.02 or 13xFY06 earnings. Reiterate Buy' for 20 per cent upside.

- BUY