Investment Highlights

• Maintain BUY call recommendation on Cape EMS (Cape) with a lower fair value (FV) of RM1.31/share (from RM1.47/share previously) to account for lower earnings estimates. Our FV is based on an unchanged FY24F PE multiple of 18x, implying a compelling PEG of 0.49, in contrast to peers’ average of 0.67 (Exhibit 2). We ascribe a neutral 3-star ESG rating to the company.

• Cape’s 9MFY23 core net profit of RM38.2mil generally came below expectations, accounting for 65% of our earlier FY23F earnings and 67% of the street’s. Hence, we cut FY23F-25F by 12%/11%/7% to account for lower product selling prices and sales volumes assumptions.

• The group declared an interim 3QFY23 dividend of 0.55 sen/share, following a dividend of similar amount in 2QFY23 (leading to a 27% payout in 9MFY23), which we deem to be below our earlier expectation, accounting for only 58% of our earlier full-year forecast of 1.9 sen/share.

• On a YoY basis, Cape’s 3QFY23 core earnings improved by 61% to RM15mi, notwithstanding a modest 5% increase in revenue. The stronger earnings growth was predominantly attributable to a favourable product mix consisting of higher margin products and the absence of tax charges.

• On a QoQ basis, Cape’s 3QFY23 core earnings increased by 44% in tandem with a 12% increase in revenue from stronger sales in wireless communication equipment and electronic cigarettes. The stronger improvement in core earnings was mainly ascribed to the absence of tax expenses compared to RM3mil tax charge in 2QFY23. In contrast, Cape's gross profit margin declined by 2%-point QoQ due to reasons to be clarified by management later today.

• Cape executed a joint venture agreement with a Singaporebased Vectrix Technology to sell and distribute electrical vehicles, related accessories and infrastructure in early-Oct 2023. The impact to our FY23F-25F revenue will be clarified in the briefing today.

• Despite a lower-than-expected result, we continue to like the stock given its favourable position to ride on multiple rising secular growth trends: 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 P/E of 15x vs peers such as Nationgate’s 21x and Aurelius Technology’s 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.

Source: AmInvest Research - 21 Nov 2023