Investment Highlights

• We initiate coverage on Cape EMS (Cape) with a BUY call and fair value (FV) of RM1.47/share with a total potential return of 18% (16% potential capital gain and 2% dividend yield).

• Our FV implies a compelling PEG of 0.65, in line with peers’ average of 0.67. The FV is derived from FY24F PE multiples of 18x, based on a 39% premium compared to the average valuation of 13x of Cape’s local peers. We believe the premium is justified given Cape’s unique position to ride on multiple rising secular trends. We ascribe a neutral 3-star ESG rating to the company.

• Cape is a local end-to-end electronic manufacturing service (EMS) provider that caters to a diverse clientele of multinational corporations in various subsectors. Through its key customers, Cape is a proxy to ride on multiple secular growth trends, namely i) adoption of 5G, ii) evolution of digital payment ecosystems, iii) Internet of Things, and iv) shifting trends to e-cigarettes over the conventional alternative.

• The company’s diversified client base geographically and end-market demand driven by different economic sectors suggests that its revenue base is relatively more resilient against economic shocks than peers, who are mostly concentrated on consumer electronics products.

• Beyond its bread-and-butter contract manufacturing services, the group goes the extra mile by offering value-added services such as aluminum die casting, new product development and marketing/sales on behalf of customers. This enhances client retention on top of paving opportunities for Cape to increase its existing customers’ share of wallet.

• On top of that, Cape is being run by qualified personnel with vast experience within their current roles. The company’s rapid growth over the past several years is mainly attributed to the management team’s established relationship within the industry and technical know-how capabilities garnered from decades of combined experience.

• All in, we are forecasting the group’s FY22F-FY25F earnings to grow by 37% CAGR, backed by healthy CAGR revenue growth of 26% and improving EBIT margin trend from a gradual pick up in operating leverage.

• The healthy and organic revenue growth will be supported by secular trends boosting demand for end-market products, particularly within the wireless communication, POS terminal and smart utility data collection segments.

• The Stock Trades at Compelling Valuations of 0.32 PEG Ratio Vs. Peers of 0.67.

Source: AmInvest Research - 12 Apr 2023