While the upcoming 2QFY21 may be impacted by the 60% workforce restriction due to MCO 3.0, orders from customers remain intact. The group is optimistic of being able to catch up on backlogs as well as new in-coming orders, in 2HFY21. Demand remains at elevated levels due to the on-going work-from-home trend. Backlog and new orders in July alone could potentially outpace 2QFY21 level. Meanwhile, PIE is on track to secure two more new customers. We remain positive on the company even after factoring in extra cost incurred due to the MCO 3.0. Maintain OUTPERFORM with a lower Target Price of RM3.30.

Manageable impact from lockdown. The movement control order (MCO) 3.0 has more stringent enforcement compared to MCO 2.0. PIE has recently gone through two unannounced inspections by the Malaysia National Security Council and the local police during this period which they passed both without any issue. However, having to shut down for a week in April for sanitisation coupled with a restricted workforce of 60% is very likely to impact its upcoming 2QFY21 performance due to reduced production output. Thankfully, the orders from customers have remained intact. Barring further lockdown extensions, the group expects 2HFY21 to be much better as backlog and new orders in July alone could potentially outpaced the lacklustre period in 2QFY21.

To speed up the vaccination process, PIE is in the midst of applying for the Public-private Partnership Covid-19 Industry Immunisation Programme (PIKAS) and aims to have all employees vaccinated with the first dose by the end of July. This will get the group ready in anticipation that the government will allow fully vaccinated companies to resume operating at 100% workforce.

Customers’ forecasts remain bullish. While there is slight delay in production output, the group remains optimistic for the full year as orders from customers remain very strong. Demand for their end-products continue to be highly sought after owing to the on-going work-from-home trend. The group indicated that in 2HFY21, it will be able to catch up on backlogs as well as new orders coming in. Meanwhile, the group continues to work on new customer acquisition as it is in talks with two high potential customers, currently at the final stage of negotiation.

We reduce our earnings forecasts for FY20E/FY21E by 18%/11% to  RM59.8m/RM76.0m as we factor in higher cost incurred to comply with the SOP during the lockdown period and delayed timeline of the group achieving a well optimised production yield owing to limited workforce.

Maintain OUTPERFORM with lower Target Price of RM3.30  (previously RM4.00). We base our valuation on 21x FY21E PER representing +1SD 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 - 5 Jul 2021