MERRILL LYNCH, March 21

MFS share price has done very well over the past six months (+115 per cent) and is up 54.5 per cent year to date. This was on the back of strong profitability and earnings recovery as well as potential M&A activity. We feel that current share price has factored in the positive outlook and believe upside from here is limited.

After a spectacular December 2005 quarter (FY Q106) where margins came in above expectations, we believe Q2 will see a decline in sales as well as profitability. Utilisation in the key Singapore and Malaysia plants has dropped from almost 100 per cent at the start of calendar 2006 to 70 per cent. And average sales price for handset-related flexible printed circuits to key customers are believed to have declined some 5-10 per cent as a result of the annual cost reduction programme.

We are cutting our earnings estimates by 14 per cent for FY06 to $46.7 million and by 11.5 per cent for FY07 to $53.1 million. We have also lowered slightly our revenue estimates as well as tax assumptions. Based on revised estimates, MFS is currently trading at 15.3x FY06E EPS and 13.5x FY07E EPS, which is no longer cheap in our view. Downgrade to 'neutral'.

NEUTRAL