We expect FPI to post solid revenue growth for the next two years on the back of (i) new contract order from its existing biggest client and (ii) Roland’s expansion latest by 2020. Entering into FY19 without bulky capex, this may enhance the group’s ability to divvy; we are projecting a dividend yield of 6.2% for FY19. We are expecting sales to grow YoY but softer QoQ for the upcoming 4Q18 earnings as 3Q is usually the strongest quarter. Maintain BUY with an unchanged TP of RM2.32 pegged to 13x of average FY19-20 EPS.

Positive takeaways. We had a short meeting with FPI last week with 11 fund managers and analysts from the buy-side and walked away on a positive note. Below are the key takeaways from the meeting.

Visibility into FY19 is good. Management’s commentary was constructive on hitting 15% revenue growth in FY19 underscored by the additional 20% capacity contribution from audio segment production. The new plant rolled out earlier-than-expected in early Dec 2018 which was built to cater for the new contract win from its existing largest customer. The new contract will take up 70-80% of new plant’s capacity. The remaining capacity will be use to broaden its scope of service including ODM orders to strengthen its position in the market as a contract manufacturer.

Growth will continue in 2020. Roland (FPI’s existing customer) is currently renting 2 plants from FPI for in-house production. FPI will have a 3rd plant to offer Roland for rental by June 2019, as the latter is looking to ramp up production capacity. We believe Roland may be looking for opportunities to relocate some production lines from China and Indonesia to Malaysia for cost optimisation. If this materializes, there will be a higher demand of FPI’s musical instrument components from Roland, providing an upside to earnings.

4Q18 earnings trajectory. 4Q18 results are expected to be released on the 22 Feb 2019. We are expecting FPI to post EPS of 4.0sen in 4Q18 with sales increasing by ~8% YoY but softer against 3Q, which is usually the strongest quarter. In terms of margin (EBITDA), we expect it to remain flattish YoY at ~8-9%.

Attractive dividend yield. Necessary expansion capex were spent in FY18; hence moving forward, this should normalize to ~RM10m in FY19 (from ~RM20m in FY18). With the absence of bulky capex moving forward, and its strong net cash position of 56.2sen/share (as of 3Q18), we opine FPI is in a good position to pay out a higher dividend in FY19. According to our forecast, we expect the group to pay out 11sen/share in FY19 (dividend yield of 6.4%).

Turned Shariah compliant. FPI was newly classified as a Shariah-compliant security on the 29 Nov 2018. With its current low institutional holding, we view this as a plus point, as buying opportunity is now open to more funds.

Forecast. Unchanged as the meeting yielded no major surprises.

We maintain BUY with unchanged TP of RM2.32. FPI is now trading at 9.7x to our FY20 EPS, which is a discount to its peers (Figure #1), which we feel the risk reward remains attractive relative to other EMS players. We continue to like this company for its niche position owing to its focus on audio components and musical instrument parts. Furthermore we also like FPI for their (i) ongoing expansion plans; (ii) strong balance sheet (net cash per share of 56.2 sen or 35% of market cap); (iii) generous dividend yield of 5.5%; and (iv) synergic partnership with global EMS leader (Wistron).

Source: Hong Leong Investment Bank Research - 17 Jan 2019