We came away from a meeting with PIE’s management still feeling POSITIVE on its mid-term prospect. While its 2H16 will still be plagued by the underlying STB sales weakness (thus prompting us to cut our FY16E CNP further), light at the end of tunnel will be seen in FY2017, anchored by new pipeline projects, which will be sufficient to offset the former’s sales shortfall, even at a very conservative assumption. Post-earnings revision (FY16E/FY17E CNP: -27%/-7%), our TP is lowered to RM2.49 (from RM2.67). Any price weakness from panic selling presents a buying opportunity. Maintain OUTPERFORM.

FY2016- a gestation period for the group. In addressing the concern of the group’s 2H16 prospect, management shed more lights on the underlying sales weakness from its STB customers, which should see much lower sales contribution (than we expected) due to the end customers’ portfolio restructuring exercises. Recall that the STB box-build business was one of the key earnings drivers that drove the group’s earnings in FY15.

Light at the end of the tunnel will be seen in FY17. While FY16 appears to be a muted year for the group given the above mentioned, the group’s efforts in nurturing growth with existing major and cultivating new customers came in just in time to offset earnings shortfalls that might also potentially spill over into FY17. We understand that these positive developments, which are the new projects, will be awarded by existing and new customers. Even with our conservative new sales assumption, which is at half of the value from the potential projects (that will commence in FY2017 on a gradual basis), it is already offsetting the sales contribution from its existing STB customers. We understand that no major capex will be incurred as the existing facilities are already sufficient to take up the orders.

Skillful enough to sail through the choppy sea. Despite the weaker macroeconomic condition not favouring the group’s prospect in the short-term as reflected in its 1H16 results and bleak 2H16 outlook, the group continues to showcase its strength by winning more orders from key customers that will see low hanging fruits in FY17. We see these as the signs of confidence by its customers, showcasing the group’s excellent manufacturing capabilities.

Maintain OUTPERFORM with a lower TP of RM2.49 from RM2.67 (based on a targeted PER of 15.0x). Post-meeting, we reduced our FY16E CNP further by 27% to account for the lower sales from its STB customers as well as operation deleveraging. Meanwhile for FY17E CNP, we trimmed our earnings by 7% to mainly account for different product mixes, after taking into consideration the contribution of new projects and lower sales assumptions from STB. The group’s superior margins, advanced manufacturing capabilities as well as strong parentage support from Foxconn Technology Group remains as key investment merits.

Risks to our call include (i) slower-than-expected sales, (ii) loss of orders from its key customers, and (iii) adverse currency translations.

Source: Kenanga Research - 16 Aug 2016