Investment Highlights

• Maintain BUY call recommendation on Cape EMS (Cape) with an unchanged fair value (FV) of RM1.47/share. The FV is derived from FY24F PE multiple of 18x Our FV implies a compelling PEG of 0.65, in line with peers’ average of 0.67. We ascribed a neutral 3-star ESG rating to the company.

• We made no changes to our forecasts as Cape 1QFY23 results were largely within our expectations The group’s core net profit of RM13mil accounts for 22% of our full-year FY23F earnings and 23% of street’s. We exclude the oneoff RM4mil listing expense recognised during the quarter from core earnings calculation.

• The 42% QoQ increase in core PATAMI was bolstered by a 16% improvement in revenue. The higher sales are mainly attributed to contribution of its recently onboarded Mongolia-based customer related to thermal energy devices as well as ramp up of production for existing clients.

• The group’s facilities utilisation rate now reached close to 50% level, from <45% in end-2022. Cape is expected to double up production volume of e-cigarettes for its Customer A. Notably, the group’s net margin improved 1.6%-point following the improvement in the group’s operating leverage.

• In terms of revenue contribution, key customers i.e., wireless communication devices (Mimosa Network and Airspan Group) and e-cigarette (Customer A) clients contributed evenly at 27% each to total sales in 1QFY23.

• To drive its future growth, the group is currently exploring electric vehicles, sports equipment, and Internet of Things space. We continue to like the stock given its position to ride on multiple rising secular growth trends namely i) adoption of 5G, ii) evolution of digital payment ecosystems, iii) Internet of Things, and iv) shift towards ecigarettes from conventional alternatives.

• From valuation perspective, the stock is trading at an undemanding FY24F PE of 16.6x. Given its unique position of having exposure in multiple growth sectors and diverse revenue base, we believe the company deserves to trade at a premium compared to peer average of 13x given Cape’s current attractive PEG of 0.5 vs peers’ 0.67.

Source: AmInvest Research - 25 May 2023