PIE’s 9MFY22 results missed expectations slightly due to lingering labour issues. Nonetheless, 9MFY22 core net profit still grew 12% YoY driven by higher orders from existing customers as well as a new order from an ASIC-based equipment maker. We trim our FY22- 23F earnings forecasts by 3% each, reduce our TP by 15% to RM3.15 (from RM3.70) but maintain our OUTPERFORM call.

Below expectations. 9MFY22 core net profit came in slightly below expectations at only 66% and 65% of our full-year forecast and the full year consensus estimates, respectively. The key variance against our forecast came from lower productivity as the labour shortage issue in 2QFY22 extended further into early 3QFY22.

YoY, 9MFY22 revenue rose 11.4% owing to higher orders received from existing customers as well as the contribution from a new customer which is involved in the ASIC-based equipment for the decentralised finance (DeFi) industry. As a result, 9MFY22 CNP also rose in tandem by 11.6%.

QoQ, 3QFY22 turnover contracted 12% due to the transition of new foreign workers that came in during Aug-Sep. However, its core net profit almost doubled thanks to improved efficiencies, partially due to the new batch of workers who turned out to be highly competent, resulting in reduced over-time charges and unnecessary wastage and downtime.

Banking on a seasonally stronger 4Q. Moving into the subsequent quarter, we expect 4QFY22 to be stronger QoQ owing to its seasonal earnings trend as customers typically push for deliveries to be fulfilled before closing the year off. We learnt that the group has completed the onboarding and selection process of all the new batches of foreign workers. In addition, most of PIE’s customers have agreed on the upward revision in ASP in end-3QFY22 which will factor in higher wages as well as cost of raw materials. The new pricing will be reflected in 4QFY22, indicating that margins will see gradual improvements from here on.

Forecasts. We trim FY22F and FY23F CNPs by 3.0% and 2.9% to RM63.9m and RM75.7m, respectively.

We continue to like PIE for: (i) its comprehensive skillset, making it a top choice EMS provider for MNCs, (ii) various competitive advantages it enjoys as a unit of Foxconn, and (iii) its diversified and evolving client base, from those involved in communication devices, power tools and the latest DeFi equipment.

We reduce our TP by 15% to RM3.15 (from RM3.70) to reflect the recent downtrend in the sector’s forward PER. Our TP is now based on a lower 16x FY23F PER (from 18x previously), which is still at a premium to the updated peer average forward PER of 13.5x (from 16x previously). The premium is to reflect the group’s broader skillset which enables the group to achieve a well-diversified customer portfolio. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain OUTPERFORM.

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 - 21 Nov 2022