PIE expects a better 2HFY22 as its labour shortage issues are gradually improving with the arrival of new foreign workers. In addition, PIE is sanguine on recovering c.90% of the provision for slow-moving inventory (c.RM5.8m) as orders from all customers remain resilient. In addition, customers are agreeable to share higher cost of production with the upward revision of ASP, to be reflected progressively in subsequent quarters. Maintain OUTPERFORM with an unchanged TP of RM3.70.

We had a meeting with the group yesterday with the key takeaways presented below.

1. Despite noises of slowing momentum in the DeFi space, we learnt that demand from a Chinese customer (relating to ASIC hardware) remains resilient. The customer came down to Penang last week to officiate the opening of the 120k sq ft plant fully dedicated for their product. At present, the new plant is already 70-80% occupied and is expected to see fruitful contribution in 2HFY22 as PIE picks up the pace.

2. Pertaining to the provision for slow moving inventory (approx. RM5.8m) which was reported in the group’s recent 2QFY22 earnings release, PIE reassured that it’s a common practice and c.90% of it would be reversed in 2HFY22, with majority of it in 4QFY22 where it ramps up production for its seasonally stronger quarter. The group does not expect to see further provision in 2HFY22.

3. PIE’s labour shortage struggle is expected to improve from September onwards as it aims to complete the recruitment process of new foreign workers by the end of August, while all levy and recruitment fee have been fully expensed in 2QFY22. This will alleviate the bottlenecks and inefficiencies on the production floor, lowering overtime salary expenses. While the newly recruited workers will be sufficient for FY22’s growth plan, the group is already starting to apply for additional quota in anticipation for more business wins when its new 150k sq ft plant is ready by end-2022.

Forecast. Maintained

Maintain OUTPERFORM call with an unchanged Target Price of RM3.70 based on unchanged 18x FY23F (a slight premium to peers’ forward average of 16x, justified by its strong clientele which will contribute to its margin expansion). 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 - 17 Aug 2022