Investment Highlights

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

• Cape’s 1HFY23 core net profit of RM23.3mil generally came in within expectations, accounting for 40% of our forecast and 41% of street’s.

• We expect a stronger 2HFY23F bottomline underpinned by (a) 30% YoY expansion of e-cigarette refill pod production lines, (b) 60% YoY expansion of smart meter production lines, and (c) seasonally stronger 3QFY23 sales. Hence, we made no changes to FY23F-25F earnings.

• The group declared an interim 2QFY23 dividend of 0.55 sen/share (leading to a 20% payout in 1HFY23), which we deem to be in line with our expectation, accounting for 30% of our full-year forecast of 1.9 sen/share.

• The 21% QoQ decrease in core net earnings was in tandem with an 11% decline in revenue. The lower sales are mainly attributed to a decrease from recently on-boarded Mongolia-based customer related to thermal energy devices under electronics manufacturing system (EMS) segment, following a sizeable bulk purchase in 1QFY23.

• Therefore, the group’s plant utilisation rate dropped to 45%-50% level, from 50% in 1QFY23. Hence, the group’s net margin decreased 1.0%-point due to lower economies of scales.

• To drive its future growth, the group is currently exploring electric vehicle (EV) segment, 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, iv) EVs, and v) shift towards e-cigarettes from conventional alternatives in USA market.

• The stock is trading at an undemanding FY24F PE of 15x. Given its unique position of having exposure in multiple growth sectors with a 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 0.53 vs peers’ 0.67.

Source: AmInvest Research - 22 Aug 2023