INVESTMENT MERITS

- It is just the beginning. Including dividends, PIE has gained 35% since our 1st Trading Buy report issued on 18 April 2013 compared to the FBMKLCI which only rose by 4.1% over the same period (a significant outperformance of 30.9ppt). Nevertheless, we believe there is still more value and further upside for the stock.

- High potential to grow earnings! Through our recent meeting with PIE’s management, we derived added conviction on the stock’s potential and believe its earnings are at an inflection point following a poor year in FY12. We believe that earnings growth will be driven by: (i) the rapid growth of the electronics and telecommunications market, ii) opportunities to leverage on Foxconn’s network and expertise (PIE is closely linked with Foxconn), and (iii) its wide product offerings to cater to diverse clientele.

- Leveraging on the tech industry upcycle? Furthermore, prior efforts to integrate the supply chain should also complement PIE’s advantage in automation, which would enable the Group to gain an added cost advantage within this highly competitive market. This positions PIE in the forefront to attract increased business from new and existing customers, and leverage on what looks to be a new upcycle within the global technology industry. In fact, the recent two quarters have shown a marked YoY improvement to its revenue (+19% YoY in 2Q13 and +37% YoY in 3Q13), which exemplifies PIE’s ability to secure new job contracts.

- Recap of 9M13 results. PIE’s 9M13 revenue grew by 19.6% YoY, while net profit increased by 23.9% YoY. The improved topline was mainly due to higher demand for electronic manufacturing products, which was more than able to offset the lower demand on other products such as raw wire, cables and trading goods. We suspect that the IPTV set-up box project from a new customer had played a pivotal role in the driving the topline growth and we expect the overall impact to 4Q13 earnings to be even more pronounced given the seasonally stronger quarter.

- We reiterate our TRADING BUY call with higher TP of RM7.56. We are raising our FY13E earnings projection by 19% to RM39.1m (+14% YoY) on a higher revenue assumption and also introduce our FY14E earnings projection of RM48.4m (+24% YoY). At the same time, we roll over our valuation from FY13E to FY14E based on an unchanged target PER of 10x (which is the 5-year average PER). This implies a target price of RM7.56 (from RM5.14 previously), and a still decent total return of 33% (including 38 sen in dividends) from current levels.

SWOT ANALYSIS

- Strength: A fully integrated one-stop turnkey EMS provider.

- Weaknesses: volume gain at the expense of margins

- Opportunities: New markets via strong network and expertise.

- Threats: Continuous innovation needed to remain competitive.

TECHNICALS

- Resistance: RM6.15 (R1), RM7.00 (R2)

- Support: RM5.00 (S1), RM4.35 (S2)

- Comments: An “Ascending Triangle” has taken shape on the daily chart following the breakout above the RM5.00 resistance last month. As a result, the chart pattern suggests that PIE could make its way towards RM6.78 next (which is based on the aforementioned chart pattern measurement objective).

BUSINESS OVERVIEW

PIE, which was listed on Bursa Malaysia in July 2000, is an electronic manufacturing services (EMS) company primarily engaged in the manufacturing and assembly of cable and wire, fabrication of moulds and dies, PCB assembly using precision SMT, plastics injection moulding and Class 10K and 100K clean room product assembly and testing of electronic products. In addition, PIE is capable of providing a complete integrated ‘one-stop’ CEM (contract electronic manufacturing) services to the major MNCs with its new up-to-date manufacturing facilities. Most of PIE’s products are exported directly or indirectly to USA (60% of its revenue), Europe (30%) and the Asia Pacific region (10%). PIE is related to the world’s largest contract manufacturing services group, Hon Hai/Foxconn Technology Group, where the latter owns a 20.8% stake in PIE’s parent company, Pan-International Industrial Co. Ltd, which has a 51.4% stake in PIE.

BUSINESS SEGMENTS

Its principal activities are mainly categorised into two major divisions, namely:

 Manufacturing of industrial products. This division manufactures cables and wires for electronic devices, cable moulding compounds and PCB assemblies and also wire harness for the computer, communication, consumer electronic industry.

 Trading of electrical products. This division trades computer peripheral products, which include scanners, CD-ROM, CD-RW, DVD player/recorder, bluetooth headset and etc. for the ASEAN region covering primarily Thailand, Indonesia and Malaysia. The company is also involved in the marketing and trading of cable assembly for the Southeast Asia region.

Source: Kenanga