2QFY22 marks PIE’s best quarterly sales but it was dampened by higher operating cost resulting in CNP of RM8.3m (-56.1% QoQ), bringing 1HFY22 CNP to RM27.1m, below expectation at 35%/36% of our/consensus estimate. Margins were compressed due to higher labour cost and higher provision for slow moving goods. However, new foreign workers have started to arrive, paving the way for a gradual recovery. Trim FY22F/FY23F CNP by 13%/9%. Maintain OUTPERFORM call with a lower TP of RM3.70.

Below expectations. PIE reported its highest quarterly revenue ever in 2QFY22 at RM296.3m while CNP came in at RM8.3m (-56.1% QoQ; - 38.0% YoY) which is below expectation as 1HFY22 CNP of RM27.1m only makes up only 35% of our, and 36% of consensus, full-year estimate.

Results’ highlight. QoQ, despite 2QFY22 revenue of RM296.3m (+11% QoQ) marking the group’s highest quarterly sales, it was severely dampened by higher operating expenses which resulted in CNP plunging 56.1% to RM8.3m, while NPM fell to merely 2.8% (vs. 7.1% in 1QFY22). The group attributed the margin compression to: (i) higher labour expense due to the implementation of new minimum wage policy in May, (ii) double to tripling of over time salary paid to compensate for less efficient local workers amidst on-going staff pinching among Penang companies, and (iii) increased provision for slow moving goods as well as inventories written down. YoY, 2QFY22 revenue rose 25.9% on higher orders but CNP was impacted by the same reasons which resulted in a 38% decline. Cumulatively, 1HFY22 revenue grew 13% to RM563.3m while CNP climbed 6.7% higher to RM27.1m.

Revising prices upwards. To recover its margins, the group has begun talking to customers on upward pricing adjustments. While most customers are receptive, the actual implementation and timing of recognition will differ according to respective customers. In addition, new foreign workers have begun arriving in batches with the entire recruitment process to be completed by the end of August. This will allow PIE to have better efficiencies and reduce the need to pay for excessive over time charges. All in all, we believe the challenges faced in 2QFY22 will gradually ease in 3QFY22 with a larger portion of the improved efficiencies being reflected in 4QFY22.

Trim FY22F and FY23F CNP by 13% and 9% to RM67.8m and RM79.1m, respectively, to account for the higher labour cost and the time lag in ASP upward revision.

Maintain OUTPERFORM call with a lower Target Price of RM3.70 (previously RM4.10) based on unchanged 18x FY23F (vs. peers forward average PER of 16x). There is no adjustment to TP based on ESG (3- star rating as appraised by us).

Risks to our call include: (i) loss of orders from/non-renewal of contracts by its key customer; (ii) labour shortage and rising labour cost; (iii) negative reviews on treatment on migrant workers by activists; and (iv) unfavourable currency movements.

Source: Kenanga Research - 15 Aug 2022