Kenanga Research & Investment

P.I.E. Industrial - Factories Humming

Publish date: Tue, 12 Jul 2022, 08:57 AM

Despite recent softness in the decentralised finance (DeFi) space, orders for ASIC hardware from its new Chinese customer as well as other products from its customer base have remained robust. This is attributable to PIE being in the sweet spot as (i) the ASIC hardware customer is pushed to relocate out from China, (ii) PIE is the preferred vendor in Malaysia that can handle the manufacturing complexity required, and (iii) PIE is able to leverage on the purchasing power of its parent company, Foxconn to ensure component supply. Maintain OUTPERFORM with a higher TP of RM4.10.

Key takeaways from our recent meeting are presented below.

1. We learnt that orders from its newly secured Chinese customer (relating to ASIC hardware) remain robust as we observed buzzing manufacturing lines with highly dense workstation arrangement during our visit. Being pushed to relocate out from China and identifying PIE as the preferred local vendor that has the capability to handle such complex manufacturing requirements explains the strong order pipeline despite the temporarily dampened sentiment in the DeFi space. After taking back a previously leased out factory (120k sq ft) in April 2022, PIE has started occupying a small area for incremental orders while the remaining space is undergoing minor renovations which will be ready by 3QFY22.

2. Against the backdrop of rising inflation and the general market fear of corporates facing margin compression, we take comfort in knowing that PIE will still be able to maintain or even potentially grow its margins as the group is fortunately able to leverage on Foxconn’s purchasing power and engineering expertise in streamlining its operation to reduce waste and improve yield.

3. Another positive development is the approval for foreign worker recruitment. While only receiving approval for a couple hundred workers (vs. application for 1,000 workers), the group believes that this would be sufficient to fuel its growth plan for FY22 and FY23. We understand that this is a common allocation practice as that many EMS companies also received lower number of workers than requested. PIE will conduct the recruitment in batches and complete the entire process by August.

We maintain our FY22F and FY23F earnings forecasts of RM77.8m and RM86.9m, respectively.

Maintain OUTPERFORM with a higher Target Price of RM4.10 (previously RM3.70) as we roll over our earnings base year to FY23F pegged to an unchanged PER of 18x. Our valuation represents a slight premium to peers’ forward average of 16.5x, justified by its strong clientele which allows for margin expansion despite an inflationary environment.

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 - 12 Jul 2022

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