PIE (TP RM5.48 - NOT RATED) Stock Idea: A Somewhat Tasty

kiasutrader

Publish date: Tue, 12 Jun 2012, 10:20 AM

We met up with PIE's management to obtain periodical updates on the company. It reported a splendid set of FY11 results with earnings jumping 48.4% y-o-y on the back of an all-time high revenue of RM349.6m, though seasonality factors and softer orders caused 1QFY12 revenue and earnings to suffer a decline on a q-o-q basis. Nevertheless, the y-o-y performance of 1QFY12 was commendable with revenue growing 5.2% y-o-y to RM80.0m and PBT increasing 8.9% y-o-y to RM9.2m. By securing orders from new clients as well as more orders from its existing clients, we believe that the company's earnings would be able to hit a new record high this year. PIE is currently trading at 6.8x FY12 PER, with a handsome gross dividend payout of 9.9% as well as a net cash position of RM92.4m, or RM1.44 per share, as at end-March 2012. We arrive at a target price of RM5.48, based on its 5-year average PER of 8.8x.

Softer organic growth from existing clientele, offset by higher contribution from new customers. PIE Industrial Bhd (PIE) posted a lower q-oq 1QFY12 result on the back of seasonality factors and softer demand from its existing clients. Generally, 1Q is deemed to be the weakest quarter of the year but the negative momentum was exacerbated by the softer-than-expected demand from its existing clients, which were affected by the European debt crisis and the weaker-than-expected recovery in the US. To track the future performance of PIE, we need to examine its main client, which is a NYSE-listed company in the US. In this particular company's latest investor and analyst meeting presentation slides, it projects a core growth of 2-5% through a combination of mid-single digit growths in emerging markets and low-single digit growths in developed markets. We reckon that this forecast is achievable given its relatively diversified stable of businesses, namely life sciences & diagnostics, industrial technologies, dental, environmental and test & measurement. Shifting our focus back on PIE, we are forecasting a revenue growth of 3% for the company, with an expected slow 1HFY12. In addition, PIE has managed to clinch deals from a few new clients and we are expecting a total contribution of about RM30m from its new clients to its top-line in FY12.

Minimum wage not an issue. We gather that there will be marginal impact from the implementation of a minimum wage of RM900 for Peninsular Malaysia. About 750 of its employees are earning between RM700 and RM800, and the implementation of the minimum wage would increase its total cost by roughly 1%.

Potential for higher dividend yield with strong balance sheet. PIE declared a total dividend of 39 sen less 25% tax (a first and final dividend of 12 sen per share, less tax and a special dividend of 23 sen per share, less tax) in FY11, which translates to an attractive gross dividend yield of 9.2%. The company is in a net cash position with its net cash per share standing at RM1.44 as at end-March 2012. PIE traditionally pays out about two-thirds of its net earnings as dividends to reward its shareholders. Assuming an EPS of 62.4 sen and a payout ratio of 67% in FY12, we are forecasting a total dividend of 42 sen for FY12, which translates into a high gross dividend yield of 9.9%.

6.8x FY12 PER, 9.9% FY12 gross dividend yield. PIE produces industrial electronic products, the demand for which is less cyclical compared to that for consumer electronics. As such, its earnings are relatively stable. Current share price of RM4.25 makes the FY12 gross dividend yield more appealing at 9.9%. We are pegging a target price of RM5.48 on PIE on the back of: (i) its unbroken profit record for the past 12 years, (ii) its earnings of RM25.3m-RM38.1m for the past five years, (iii) RM92.4m in net cash/cash equivalents as at 31 March 2012 and minimal borrowings, and (iv) high dividend payout ratio of 67%.

Source: OSK

PIE (7095)

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