9MFY19 CNP of RM25.4m came in within expectations, accounting for 65%/68% of our/consensus’ estimates, thanks to better operational efficiency for its low-end telecommunication device. Moving forward, we expect to see a continuation of earnings recovery in the upcoming quarter on seasonal ramp-up and further efficiency improvements. We keep our FY20E CNP at RM39.2m. Maintain MARKET PERFORM with an unchanged Target Price of RM1.40.

Within expectation. 3QFY19 registered CNP of RM16.8m (+109% QoQ; +18% YoY), bringing 9MFY19 CNP to RM25.4m (+14% YoY), accounting for 65%/68% of our/consensus’ estimates. We deem this to be inline as 4Q will usually see better results on the back of higher seasonal production ramp-up for existing customer. 3QFY19 revenue dipped 7.8% QoQ, due to lower order volume. However, the company made up for lost ground by improving production efficiency for the low end telecommunication device (that caused the 89% YoY nosedive in 1QFY19 net profit). No dividend declared for the quarter as the group typically declares dividend after its 4Q results.

Results’ highlight. YoY, 9MFY19 revenue climbed 8% while CNP grew 14% to RM25.4m due to lower ETR of 22% (-9.5ppt). QoQ, 3QFY19 CNP doubled (+109%) to RM16.8m, owing to favourable USD/MYR rate (4.20 vs. 4.10) and better use of raw materials after streamlining its production process. As a result, EBIT margin improved to 13.5% (+8.9ppt).

Seasonally better 4Q. Moving forward, we expect to see a continuation in earnings recovery in the upcoming quarter, 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 the company is planning to phase out its low-end communication device in the next quarter. PIE is still receiving 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. If discussions are successful, meaningful contributions will likely kick in 2QFY20.

Maintain FY19E CNP of RM39.2m. The jump in 3QFY19 earnings is well within our expectations and we have accounted for the continuation of earnings recovery into the 4Q.

Maintain MARKET PERFORM with an unchanged Target Price of RM1.40 based on an unchanged 12.0x FY20E PER. With the recent run-up in share price, we believe the market has priced in the recovery expectation in subsequent quarters.

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 - 18 Nov 2019