1H19 CNP missed expectations, accounting for only 21% of both our/consensus’ estimates due to lower-than-expected operational efficiency for its low-end telecommunication device. Moving forward, we expect some earnings recovery in 2H19 on seasonal ramp-up and efficiency improvements. Trimmed FY19 CNP by 4% to RM39.2m. Maintain MARKET PERFORM with a lower Target Price of RM1.20 (from RM1.25).

Below expectations. 2Q19 registered CNP of RM8.1m (+14x QoQ from a low base; +15% YoY), bringing 1H19 CNP to RM8.6m (+7% YoY), which was below expectations, making up only 21% for both our/consensus’ estimates. We believe the deviation was mainly attributed to lower-than-expected operational efficiency (production learning curve) in the initial manufacturing stage for its low-end telecommunication device (which resulted in higher usage of raw materials). No dividend was declared, as expected as the group typically declares dividend after its 4Q results.

Results highlight. YoY, Although 1H19 revenue leaped 16% (from contributions of its low-end telecommunication device), CNP only grew 7% to RM8.6m as higher costs of production for the said device (phasing out by 4Q19) compressed EBIT margin (adjusted) by 1.3ppt to 3.0%.

QoQ, CNP surged (14x; on low base effect) to RM8.1m, which we believe was attributable to: (i) 19% increase in sales, (ii) better product mix, and (iii) lower ETR of 8% (-39ppt).

Seasonally stronger 2H19. Moving forward, we expect to see some earnings recovery in 2H19, premised on: (i) seasonal ramp-up from its telecommunication and tooling customer, (ii) steady growth from its existing key customers, and (iii) efficiency improvement as its low-end communication device is slowly phased out. Meanwhile, PIE is still receiving multiple enquiries from companies that are looking to shift their supply chain out of China, including one potential customer which is in preliminary discussions. We believe that this potential customer could contribute sales of >RM30m, assuming full ramp-up.

Trimmed FY19E earnings by 4% to RM39.2m as we slightly lowered FY19E GP margin (-0.3ppt) to 8.1%, accounting for higher-than-expected contributions from its lower-margin telecommunication device.

Maintain MARKET PERFORM with a lower Target Price of RM1.20 (from RM1.25) based on an unchanged 12.0x FY19E PER (vs. peers’ average of 13x) due to the minor setback from its new low-end telecommunication device. Nevertheless, at current price, we believe that most negatives have been priced in. Additionally, expected dividend yields of 4.3-5.2% for FY19-20, which are quite decent, should cushion share prices.

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

Source: Kenanga Research - 19 Aug 2019