We upgrade PIE to OUTPERFORM with higher TP of RM3.30 following positive feedback in a meeting with management, premised on stronger prospects from a new customer’s entertainment device. PIE is supporting 20% of customer’s global demand and is in negotiation to ramp up further as the entertainment device is highly sought after globally and often sold out. This trend is expected to continue, driven by the work-from-home practice as lockdown restrictions tighten again owing to the resurgence in Covid-19 cases. Current capacity is maxed out with the group looking to expand its floor space (+50%) by acquiring a new plant.

Trade diversion beneficiary – exciting prospects. Due to a shift in a customer’s supply chain motivated by the US-China trade war, the group has engaged a new customer who intends to diversify from China and started production of the entertainment device. Delivery of the first batch has been completed with the second batch close behind. PIE currently supports 20% of the customer’s global volume (currently at 80% run rate), and is in negotiation to increase it further to 40%. Maiden contribution from this entertainment device has been mildly reflected in 4QFY20 with more meaningful earnings to be seen in 1QFY21 and beyond. We are expecting earnings to record QoQ growth in 4QFY20 as well as in 1QFY21.

Work-from-home trend to drive demand. We understand that the customer is a major name in the entertainment industry, which could usher in additional contracts. The current entertainment device in production has been experiencing very strong demand globally and is often sold out owing to the work-from-home trend. With countries facing a resurgence of Covid-19 cases and the UK recently re-imposing lockdown restrictions, we believe the entertainment device will continue to be highly sought after. We are upbeat over the group’s medium-term prospects given the slew of new products from existing customer in the pipeline.

Current capacity maxed out. The group’s current capacity is filled to the brim and it is in the midst of acquiring a new plant (c.80k sq ft) and will be renovating it to increase another 70k sq ft, aimed to be completed by 3QFY21. In total, the 150sk sq ft will contribute c.50% increase in floor space, enabling the group to take on more orders from existing customers, as well as new customers.

We raise our earnings forecasts for FY20E/FY21E by 21%/19% to  RM23.6m/RM66.5m as we expect the recovery momentum to continue along with strong contribution from the new customer.

Upgrade to OUTPERFORM from Market Perform with a higher  Target Price of RM3.30 (previously RM2.32) to reflect improving prospects and the inclusion of a new customer. We base our valuation on a higher 19x FY21E PER (previously 16x), representing +1.5SD to 3- year mean.

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

Source: Kenanga Research - 8 Jan 2021