· Share price jumped by c.45% within two years. Since our initial Trading Buy call on 18th April 2013 at RM3.875 (ex-bonus) with the report titled “A Timely Opportunity”, P.I.E Industrial (PIE) has surged by 45% to RM5.63 which outperformed the benchmark FBM Small Cap Index (which has only advanced by 22% to 15,345.23). We believe PIE started garnering investors’ recognition after it delivered slow albeit steady decent earnings (2-year NP CAGR of +6%) as well as decent dividend payouts yielding 5-6%.

· Recap of 1Q15 results. 1Q15 Gross Profit came in weaker at RM12.8m (-7% YoY) owing to the weaker revenue of RM111.1m (-29% YoY, which we believe was mainly due to slower STB demand by its customer). GP margin inched up higher at 11.6% (+2.8ppts) thanks to better product mix. Despite weaker top line numbers, PBT grew by 5% YoY driven by higher gains from favourable forex translations and reversal of slow moving inventories provision.

· Sowing seeds for future growth. The group will continue to strengthen its vertical integration by filling up the missing links of its manufacturing capability, i.e. with more value-added services to meet higher outsourcing orders from its new and existing customers. Capexwise, we understand that the group will spend c.RM20m to set up a new plant with earnings impact starting from 2016 onwards. We gather from the management that with all things in place in a blue-sky scenario, the group is targeting to achieve a blended GP margin of up to 15% in 2016 from the current 10-12%.

· Current valuation appears fair. Following the surge in its share prices, PIE is currently trading at a forward FY15E PER of 10.9x which is in line with the industry average valuation (electronic manufacturing services industry). We have updated our FY14A financials and introduced our FY15 earnings estimates with assumptions of lower revenue with the absence of STB contribution but higher GP margins assumption of 12% given the better product mix. With our new TP of RM5.70 (from our bullish TP of RM7.67 previously) after we peg our valuation parameters to FY15E based on a lower targeted forward PER of 11.0x (from 12.0x previously given the flat earnings growth in FY15), we believe the capital upside is limited from here. Thus we advocate investors to lock in profit for now and re-accumulate on price weakness later should such opportunity emerges. We might revisit the stock again should there be any positive catalysts.

Source: Kenanga Research - 9 Jul 2015