Investment Highlights

• Maintain BUY call recommendation on Cape EMS (Cape) with an unchanged fair value (FV) of RM1.31/share, based on FY24F P/E multiple of 18x, implying a compelling PEG of 0.59, in contrast to peers’ average of 0.68 (Exhibit 1). We ascribe a neutral 3-star ESG rating to the company.

• Our FY23F-25F earnings are maintained following an analyst briefing yesterday. These are the salient highlights:
  ➢ For wireless communication equipment, orders from Mimosa are expected to reach 400K units/annum in FY24F from 300K units/annum in 2HFY23. Cape indicated that this may increase even further in FY24F given Mimosa’s strengthened market position subsequent to its strategic acquisition by India-based Jio Reliance in Mar 2023.
  ➢ For vacuum cleaners, the group anticipates an uptick in demand in 4QFY23 and early FY24F due to: (a) the recent launch of innovative models to meet evolving customer needs, (b) end of 3-year shelf-life from strong demand in 2020, (c) the seasonal effect of year-end Christmas sales, and (d) new orders from Turkiye and Germany.
  ➢ For submetering systems, NextCentury is confident regarding the planned penetration of key markets and deployment of pioneering Internet of Things (IoT)- based photovoltaic solutions.
  ➢ For e-cigarettes, the group continues to tap on the underpenetrated e-cigarette market in USA, while recent M&A activity for Customer A in June 2023 will benefit Cape, as the acquirer has more distribution channels (250-300) than customer A alone (20-40).
  ➢ Customer Q is a USA-based multinational corporation (MNC) that designs and manufactures semiconductors, software and services in wireless technology. Cape and the customer have effectively initiated a 4-year partnership in which Cape will provide EMS services for innovative 6G base access point in FY24F, as Customer Q plans to divert production out of China.
  ➢ Customer Z is a Chinese company and an existing customer, of 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 in both America and Southeast Asia. Orders are anticipated to arrive in 4QFY23 with demand for LED products remaining robust.
  ➢ Customer T, a Mongolia-based company for thermal energy devices, started a business relationship with Cape in 1QFY23. For now, Customer T and Cape are collaboratively developing diverse micro renewable energy systems focusing on off-grid solutions for wind and water.
  ➢ Regarding a recent joint venture (JV), Cape will have a 60% equity stake and Singapore-based Vectrix Technology 40%. The JV focuses on manufacturing and designing battery swap stations for E-bikes, combining Italian R&D, Japanese quality assurance and Malaysian production. Furthermore, the JV is developing Vectrix’s first e-bike with production set to start in 1QFY24.

• 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 the US market.
  Furthermore, the recent ongoing acquisition of US-based IConn will allow Cape to serve a wider network of customers globally, particularly US customers by integrating IConn’s capability in designing and engineering electronic components.

• The stock is trading at an undemanding FY24F P/E of 16x vs. peers such as Nationgate’s 21x and Aurelius Technology’s 17x. Given a 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 as Cape’s current PEG of 0.51 looks attractive vs. peers’ 0.68.

Source: AmInvest Research - 22 Nov 2023