Our POSITIVE conviction is reaffirmed, stemming from the group’s brighter prospects in FY17 and FY18. The investment and efforts in nurturing growth are already seeing fruition; with existing and new orders piling up from its MNC customers. While wide-industry components shortages still loom over the near term, we are not overly perturbed as the late delivery is only a timing issue with orders volume still being resilient. Maintain OUTPERFORM with an unchanged TP of RM2.87.

On track for a much stronger FY17. Glancing back to 1Q17 results, the group registered record-high 1Q revenue thanks to continuing orders loading (for both EMS activities as well as raw wire and cable products) from existing customers. Note that this was against the backdrop of wide- industry components shortages, which caused some delays in the group’s orders delivery to its customers. At the bottom-line, despite higher effective tax rate, core net profit soared by 396% on better operating leveraging as well as continuous yield improvement on lower wastage. While the passive components shortages still loom the industry at this juncture, which might continue to cause late orders delivery to customers over the near term, we are not overly perturbed with the issue as the delayed orders will be fulfilled once the issue of shortages is resolved.

New projects seeing lights. Beyond the continuous loadings (for both EMS activities as well as raw wire and cable products) for the current orders, we are upbeat to gather that two out of the four new projects are already in the bag. Recall that these four projects (for the manufacturing of industrial electronics parts) are to be awarded by its existing customers; with one being an ODM project with a renowned MNC. While the two projects win (with one OEM and one ODM business model) are very much anticipated which we have already accounted earlier in our model considering the group’s high hit rate and advanced manufacturing capabilities, we see the ODM project as a door-opening opportunity for the group to tap into voluminous orders going forward. For now, we are more inclined to stick to the conservative side with our previous assumption remain unchanged. We understand that no major capex will be incurred as the existing facilities are sufficient to take up the orders.

Maintain OUTPERFORM with an unchanged TP of RM2.87 (based 15.0x FY18E PER). We made no changes to our FY17E/FY18E NPs as our key assumptions are still intact. The group’s superior margins, advanced manufacturing capabilities as well as strong parentage support from Foxconn Technology Group remain as key investment merits.

Risks to our call; (i) slower-than-expected sales, (ii) loss of orders from its key customers, (iii) components shortages, (iv) labour issues, and (v) adverse currency translations.

Source: Kenanga Research - 14 Jun 2017