Incorporated in Malaysia since 1989, P.I.E Industrial Berhad (“PIE”), a 51%-owned subsidiary of Taiwan-listed Pan-International Industrial Corp (“PAN”) is involved in the electronic manufacturing services (“EMS”) industry.
Hon Hai Precision Industry Co., Ltd (“Foxconn”) has a 30% stake in PAN, and hence is indirectly the holding company of PIE. As all would have known, Foxconn is the World’s largest EMS provider with a notable client list which includes the likes of Apple, Amazon, Huawei, Dell, Microsoft, Xiaomi, Nintendo, Sony and etc.
Starting off as a manufacturer and assembler of cable and wire, the Group has since expanded into the fabrication of moulds and dies, printed circuit board (“PCB”) assembly, plastic injection moulding, Class 10K and l00K cleanroom product assembly, and testing of electronic products.
This article introduces PIE, analyzes its business model, financial track record, business prospects, and provides our opinion on PIE as an investment target. (Visit our official site for timely updates)
PIE currently operates from two sites, with its main operation based in Seberang Jaya Industrial Estate, Penang, Malaysia and another in Prachinburi province, Thailand. The Group operates from 4 factories in Malaysia and a factory in Thailand, with a total factory floor space of about 80,000 sq ft. The Group’s total workforce is currently about 2,500.
Operations in Thailand are primarily focused on wire harness and cable assembly work, contributing just about 3% to the Group’s revenue.
The Group has three business divisions: manufacturing industrial products, trading electronic materials, and investment holding. Manufacturing of industrial products can be further broken down into (i) Electronic manufacturing services (“EMS”), (ii) Raw wire and cable manufacturing, and (iii) Cable assembly and wire harness.
During FY2020, the EMS segment contributes 83.5% of the Group’s revenue, followed by raw wire and cable manufacturing, 14.6% and cable assembly and wire harness.
With regard to the EMS segment, PIE offers a vertically integrated portfolio of services including mould and die fabrication, plastic injection moulding, LCD mould assembly, configuration, programming and testing, cleanroom assembly, complete box build, regional distribution and after-sales service and maintenance etc. Several larger clients of PIE includes Motorola, Bosch and Nintendo (recently secured).
Trading activities involve promoting the parent company’s products in the ASEAN market. The management does not expect growth from this segment. During FY2020, this segment contributes less than 1% of the Group’s revenue.
Malaysia remains as PIE’s largest market, contributing approximately 58% of the Group’s revenue, followed by USA (16.4%), Asia Pacific (13.5%) and Europe (11.4%).
Mr. Wong Thai Sun, Malaysian, aged 66 was appointed as the Group Chairman in February 2020. He has over 34 years of public practice experience in accountancy and currently having his own practice firm known as Wong Thai Sun & Associates. He is also an independent non-executive director of Emico Holding Berhad.
Mr. Mui Chung Meng, Malaysian, aged 69 heads the Group as the Managing Director since May 2000. Graduated from the University of Singapore majoring in Electronics, Mr. Mui has extensive knowledge in the fields of electronics, rubber and plastics. Mr. Mui joined Pan International Electronics (Thailand) in 1993.
Other key management staff includes:
For the past 5 years, PIE’s revenue was relatively stagnant with a compound annual growth rate (“CAGR”) of just 4.3%. As compared to its peers i.e. V.S. Industry Berhad, ATA IMS Berhad and SKP Resources Berhad who were achieving a 5-year revenue CAGR of 10% – 25%, PIE was underperforming. This can be partly due to the conservative management of PIE when it comes to securing new clients and/or committing to a significant CAPEX investment (takeaway from engagement with management).
In terms of profitability, the Group records relatively healthier and stable net margins compared to its peers. Annual net margin range between 5.0% – 7.0%, averaging at about 6.6%, while its peers’ margin range lower between 2.0% to 7.0%, averaging about 4.0%.
During FY2020, the Malaysian EMS providers’ performance was resilient as they all recorded top and bottom-line growth despite the production halt in March/April. The Group’s return on equity (“ROE”) over the past 5 years ranged between 8% – 12%. FY2020 ROE was 9%.
PIE generates strong and consistent cash flow from operations with an average CFO to Net income ratio of about 1.4x for the past 5 years. FCF to Net income ratio were >1.0x over the years.
The negative CFO to Net Income ratio in FY2020 was due to an increase in trade receivables and inventory. These were due to an increase in revenue and inventory stocking up by management in anticipation of the electronics chip shortage.
The negative FCF to Net Income ratio during FY2016 and FY2020 were due to management commitment to a high dividend payout ratio (>40%) despite lower cash generated and significant CAPEX invested.
The Group has minimal bank borrowings and is in net cash of RM122.5m as at 31 December 2020.
No concern on the Group’s financial position given the healthy solvency and liquidity position.
Compared with the preceding year’s corresponding quarter, the significant increase in revenue was attributable to increased orders from new and existing EMS customers and resumption of production at full capacity. Higher profits were due to higher revenue, better margins and reversal of provision for slow-moving inventories.
However, in comparison to the immediate preceding quarter, the Group recorded a drop in profit despite being 7% higher in revenue. The decrease was mainly due to higher administrative and distribution expenses, and the weaker USD throughout the quarter.
Based on the latest quarter results, the Group seems to be on track to close FY2021 at above RM1bil in revenue (Note: 1Q results are seasonally lower in the year due to shorter working days in Malaysia). Profitability would be of concern on whether the Group can sustain its high margin achieved in 4Q2020.
KEY STRENGTHS & PORSPECTS FORWARD
KEY RISKS FOR CONSIDERATION
Besides Pan Global Holding Co. Ltd which holds 51.4% stake in PIE, other notable shareholders include Public Smallcap Fund (3.4%), Employees Provident Fund (3.3%), Public Strategic Smallcap Fund (1.8%), Public Islamic Growth Balanced Fund (0.8%), Singular Value Fund (0.7%), PMB Shariah Growth Fund, Kenanga Growth Fund and Gibraltar BSN Fund etc.
Mr Mak Tian Meng, a prominent value investor also holds a significant stake in PIE totaling 3.8%.
Compared to the list of major shareholders a year ago, we note that Public, Singular, PMB, Kenanga and Gibraltar BSN have all been increasing their stakes in PIE.
Table below compares PIE to several of its closest peers within the EMS industry.
Taking into consideration of PIE’s outstanding track record, consistent dividend payout and promising outlook, we value PIE at a forward PE range of 15x – 25x. The range is consistent and comparable to its industry peers.
HOW MUCH DO WE VALUE PIE?
Based on management indication and our best estimate of PIE’s FY2021 performance, we opine the recent retracement of PIE’s share price by around 20% from its peak, an opportunity for investors to initiate/accumulate a position.
Long term prospect of the Group is intact with secured orders waiting to be delivered. Further, more upsides are expected as the Group expands and upgrade its manufacturing facility.
At a recent management briefing, we were updated on the following:
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2021-05-26 15:53