Investment Highlights

• Maintain BUY call recommendation on Cape EMS (Cape) with an unchanged fair value (FV) of RM1.47/share, derived from FY24F PE of 18x. This implies a compelling PEG of 0.65, 10% lower than peers’ average of 0.72 (Exhibit 1). We ascribe a neutral 3-star ESG rating to the company.

• Our FY23F-25F earnings are maintained following an analyst briefing yesterday as the revenue loss from Tastar Electronics could be offset by stronger orders from Mimosa and new orders from Customer Z. These are the salient highlights:
  • The group expects improvement in plant utilisation to 60%-70% in 3QFY23F, from 45%-50% in 2QFY23, 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 3Q sales.
  • For wireless communication equipment, Mimosa, which acquired by India-based Jio Reliance in Mar 2023, increased orders from 100k units/annum to 300k units/annum (+RM20mil or 3% of FY23F revenue). This has not yet been factored in our FY23F revenue.
  • For vacuum cleaners, the group anticipates a rebound in 2HFY23F orders, following a slowdown in 1HFY23, driven by (a) the introduction of new models for Christmas season, (b) the end of 3-year shelf-life since strong demand in 2020, (c) the seasonal effect for year-end Christmas sales, and (d) new orders from Turkiye and Germany. Nevertheless, we have already accounted for this recovery in our FY23F earnings.
  • For POS terminals, Tastar Electronics halted orders from early 2Q until Aug 2023 due to the expiration of old models. We estimate that a 5-month sales loss translates to RM30mil-35mil or 4%-5% of FY23F revenue. On a positive note, Cape expects the introduction of new models to be announced in late 3QFY23 which we believe can support 4QFY23F revenue.
  • For e-cigarettes, a 30% YoY expansion of refill pod production lines in FY23F will allow the group to continue tapping on the underpenetrated e-cigarette market in USA, and recent M&A activity for Customer A in June 2023 will benefit Cape, as the acquirer has more distribution channels (i.e., 250-300) than customer A alone (i.e., 20-40).
  • Separately, Cape acquired 2 new customers, namely Customer Q and Customer T, as well as a new contract order from existing customer Z.
  • Customer Q is a USA-based multinational corporation (MNC) that designs and manufactures semiconductors, software and services in wireless technology. Recently, Cape entered into an early agreement to provide EMS services for Internet of Things (IoT) control modules (mainly 7G products for AI robotics) as Customer Q is diverting production out of China. This agreement has a potential contract value of RM100mil/annum. We gathered that orders could come in by 2QFY24.
  • Customer Z is a Chinese company and an existing customer for which Cape provides EMS services for LED products. Recently, the group was awarded a contract to supply cables for electric vehicle (EV) charging stations. Notably, the end-products are supplied to major EV players from both America and Southeast Asia. Orders are anticipated to arrive in 4QFY23F, with a revenue contribution of RM50mil-RM60mil per year, translating to RM12mil-15mil in 4QFY23F.
  • Customer T is a Mongolia-based company for whom Cape supplies thermal energy devices, starting in 1QFY23 with a contract value of RM50-60mil/annum.
• To drive future growth, the group is currently exploring the EV segment and IoT space. We continue to like the stock given its favourable position to ride on multiple rising secular growth trends namely i) adoption of 5G, ii) evolution of digital payment ecosystems, iii) IoTs, 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 vs peers such as Nationgate (23x) and Aurelius Technology (17x). 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 16x given Cape’s current attractive PEG of 0.52 vs peers’ 0.72.

Source: AmInvest Research - 23 Aug 2023