Despite possessing excellent manufacturing capabilities, PIE was not able to buck the weak macro-economic conditions which were not in its favour with slower-than-expected orders from some of its overseas customers. Coupled with lower operational efficiency as well as adverse currency translations, the group’s 1H16 results came in below our expectation. Post earnings downwards revision, our TP is also lowered to RM2.67 from RM2.91. That said, we are still sanguine on the group’s mid-term prospect as we understand that the group is already nurturing growth with existing major customer while cultivating new ones by providing higher value-added services. Hence, we maintain our OUTPERFORM rating.

1H16 results came in below, as the group recorded 2Q16 core net profit (NP) of RM8.6m (+373% QoQ; -23% YoY), bringing 1H16 CNP to RM10.4m (-54%). This only made up 17% of our full-year estimate (vs. past 3-year trend of 38%- 52% for the full year). Note that 1H16 CNP has been adjusted for: (i) net allowance of impairment losses for trade receivables amounting to RM0.6m, and (ii) net write-down of inventories amounting to RM1.6m. The negative deviations were: (i) lower operational efficiency (with product outputs insufficient to counterbalance the high overhead cost), (ii) higher-than-expected administration and distribution expenses, and (iii) adverse currency translations (1H16: -RM2.7m vs. 1H15: RM5.8m). As expected, no dividend was declared.

YoY, revenue increased by 3%, underpinned by both trading (+25%) and manufacturing segments (+3%). On a closer look at the lion’s share manufacturing segment, the growth was driven by higher orders from its TELCO customer, offsetting the slower box build business from STB and PC customers. We took comfort that the orders gained from this TELCO customer was, in fact, grabbed from other competitors, suggesting that the group is gaining higher confidence from this customer which could mean higher orders in the future. However, the growth was insufficient to offset the high overhead costs, which caused a 10% dip at its GP level. Compounded with higher other expenses inclusive of the forex losses and administration expenses, core NP registered a drop of 54%. QoQ, we attribute the stronger 2Q16 revenue (+14%) to the normalisation of low base in 1Q16. On a closer look, both manufacturing and trading segments improved by 13% and 71%, respectively. Meanwhile at the operating income level, EBIT jumped by 178% mainly helped by favourable currency translation on top of better operation leveraging.

Skillful enough to sail through the choppy sea. Despite the group’s better manufacturing capabilities (compared to the previous years) which enable the group to provide higher value-added services and hence more door-opening opportunities, the weaker macroeconomic condition does not move in the group’s favour with slower-than-expected orders from its overseas customers in the 1H16. That said, we are still sanguine of the group’s mid-term prospect as we understand that the group is already nurturing growth with existing major and cultivating new customers by providing higher value-added services. Recall that the group has secured a new European customer this year 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.

Maintain OUTPERFORM with a lower TP of RM2.67 from RM2.91 (based on a targeted PER of 15.0x). Post-results, we reduced our FY16E/FY17E NP by 20%/8% to account for the lower sales from its STB and PC customers as well as operation deleveraging. The group’s superior margins, advanced manufacturing capabilities as well as strong parentage support from Foxconn Technology Group remained as key investment merits. Risk to our call: (i) slowerthan- expected sales; (ii) loss of orders from its key customers, and (iii) adverse currency translations.

Source: Kenanga Research - 9 Aug 2016