P.I.E Industrial Bhd (PIE) is an Electronics Manufacturing Services (EMS) provider with a global clientele base specialising in the Telecommunication, Medical and Data-collection industries, which is capable of providing complete integrated ‘one-stop’ EMS services to major MNCs. We like PIE for: (i) its state-of-the-art manufacturing capabilities underpinned by constant vertical integration, which provides higher value-added services (thus higher margins) and higher chances of winning other contracts in the near to medium term, (ii) strong parentage support from the world’s largest EMS group, Hon Hai/Foxconn Technology Group, which allows PIE to tap on its parent’s first class engineering and manufacturing capabilities, (iii) strong and sustainable growth prospects (2-year NP CAGR of 12%) with generous Dividend Payout Ratio (DPR) of at least 40% from its PATAMI (translating into decent dividend yield of 3.0%-3.4%). We initiate coverage on PIE with an OUTPERFORM call at a target price (TP) of RM14.55. This is based on a targeted 15.0x FY17E PER, a multiple at a 25% premium to industry peers which is justified by its superior margins, advanced manufacturing capabilities as well as strong parentage support from Foxconn Technology Group.

An integrated ‘one-stop’ EMS provider always upping the ante. PIE started off with the manufacturing and assembly of cable and wire in 1989. After the group was listed in 2000, it evolved into an EMS player and has also constantly integrate its services vertically. Today, it is capable of providing a complete integrated ‘onestop’ EMS to the major MNCs (with customers concentration spread over >50 customers) with the services of wire and cable manufacturing, cable assembly and wire-harness, fabrication of moulds and dies, PCB assembly using precision SMT, milling, die-cut and silk-screening, fully automated plastic injection moulding, metal stamping and Class 10K and 100K clean room product assembly and testing of electronic products.

Proven earnings track records with business model that has seen higher customer strike rate. Note that PIE has remained profitable ever since it got listed and achieved a 14-year NP CAGR of 14%, overcoming the ups and down of several challenging economic cycles. Besides its vertically integrated services which provide higher profitability than other EMS players, we understand that the constant improving customer strike rate has also been a major success catalyst. From our latest information gathered, we understand that the hit rate has now improved to as high as 6/10, from 1/10 previously thanks to its enhanced capabilities.

Secured a new global customer which could potentially become its major earnings contributor. Following its recent major transformation (with the additional production line on fully automated plastic injection moulding, CNC centre as well as new metal stamping division), the group has managed to secure a new European customer who is a global player in industrial electronic. Although earnings contribution from this customer is currently only <5%, we gather that more orders are likely going forward, which could turn it a major customer for PIE given its competitive pricing as well as its top-class manufacturing capabilities.

Strong parentage support from the world’s largest EMS group, Hon Hai/Foxconn Technology Group. PIE’s ultimate major holding company, Hon Hai/Foxconn Technology Group which is in turn holding >20% in Pan-International Corporation (which is currently holding 51.4% of PIE), is one of the most preferred names in EMS to global Computer, Communication and Consumer-electronics leaders. Notable products that the company manufactures include the BlackBerry, iPad, iPhone, Kindle, PlayStation, Xbox One, Nokia, Xiaomi and Wii U. Given PIE’s close proximity to the abovementioned giant tech names, not only that PIE can tap on its parent’s first class engineering and manufacturing capabilities, but also to leverage on Foxconn’s huge purchasing power in terms of raw materials as well as its manufacturing equipment. This helped to explain the higher margins enjoyed by PIE compared to other EMS players.

Strong and sustainable growth prospects even after 5-year CNP CAGR of 18%. We are projecting the group to register CNP of RM65.5m/RM74.4m in FY16E/FY17E, to be backed by a 2-year revenue CAGR of 11% mainly underpinned by: (i) more orders from its telecommunication customer and box build business from its STB customers, (ii) increasingly higher orders from its new European customer, as well as (iii) NP margin assumptions of 8.9%-9.1% for FY16E-FY17E, backed by MYR/USD assumption of RM4.10/USD.

Source: Kenanga Research - 11 Apr 2016