1Q16 core NP of RM5.0m came in below expectation which made up 8% of our full-year estimates (vs. past 3-year trend of 15%-26% for the full year). Key negative deviation was the adverse currency fluctuations (forex losses of RM4.9m vs. 1Q15 forex gains of RM4.3m). While we are cognisant of the currency impact, this does not alter our POSITIVE view on the group as we noticed that the group is still registering better revenue and gross profit growths (+8% and +5% YoY), suggesting that operationally, the group’s earnings prospect remains resilient. Moreover, USD has been stabilising to our forecast RM4.05-RM4.10/USD for 2016 and 2017. Post-results, we reduced our FY16E NP lower by 7% to mainly account for the unfavourable forex fluctuation in the 1Q16 (thus with lower USD/MYR assumption of RM4.05/USD in 2016) while leaving our FY17E NP unchanged. Any price weakness from panic selling presents a buying opportunity. Maintain OUTPERFORM with an unchanged TP of RM14.55 (based on a targeted 15.0x FY17E PER.

3M16 results were below our expectation, as the group reported a 1Q16 core NP of RM5.0m (-75% QoQ; -55% YoY) which made up 8% of our full-year estimate. Note that the core NP has been adjusted for: (i) net allowance of impairment losses for trade receivables amounting to RM1.5m, (ii) net reversal of inventories amounting to RM1.83m, and (iii) unrealised forex losses of RM3.2m. The negative deviation was the adverse currency fluctuations where USD/MYR saw a huge swing ranging from as low as RM3.90/USD to as high as RM4.29/USD during the quarter. As expected, no dividend was declared.

YoY, revenue increased by 8% driven by its lion’s share revenue contributormanufacturing segment (for industrial products). On a closer look, this segment improved by 9% underpinned by higher orders from Telecommunication customer. We were delighted to gather that the orders gained from this customer were in fact grabbed from other competitors, suggesting that the group is gaining higher confidence from this customer which could warrant higher orders in the future. While the group’s EBIT dropped by 77% due to the adverse currency fluctuations, a more meaningful comparison at the Gross Profit level suggested that the operational earnings were indeed healthy at +5% growth (GP margin at 11.3%, -0.3ppts).

QoQ, we attribute the sluggish 1Q16 revenue (-54%) to the seasonality weaker quarter where orders are typically slower, aggravated by shorter working months. Historically, 1Q revenue was seen to be reported as low as 17% over the past three years. With operation deleveraging as well as adverse currency fluctuations, EBIT decreased by 89%.

Earnings still resilient; with better liquidity coming on board. Recall that the group has secured a new European customer recently which is a global player in the industrial electronic industry. Although earnings contribution from this customer is immaterial at this juncture, we gather that more orders are likely going forward which could turn it into a major customer for PIE. With the group’s recent major transformation (with the additional production line on fully automated plastic injection moulding, CNC centre as well as new metal stamping division), we expect more orders being secured which support our conservative 2-year NP CAGR of 12%. Meanwhile, the group has also proposed a 5-for-1 share split recently (to be completed by 3Q16) which will eventually increase its share base from 76.8m to 384.0m shares. We laud this strategic move as it will: (i) make PIE shares more affordable to investors, and (ii) improve the marketability and trading liquidity of the stock.

Post-results, we reduced our FY16E NP lower by 7% to account for the unfavourable forex fluctuation in the 1Q16 (thus with lower USD/MYR assumption of RM4.05/USD in 2016) while leaving our FY17E NP unchanged.

Maintain OUTPERFORM with an unchanged TP of RM14.55 (based on a targeted PER of 15.0x). We still like PIE for its superior margins, advanced manufacturing capabilities as well as strong parentage support from Foxconn Technology Group.

Source: Kenanga Research - 30 May 2016