Kenanga Research & Investment

P.I.E. Industrial - Seasonally Soft 1QFY23

Publish date: Mon, 22 May 2023, 09:35 AM

PIE’s 1QFY23 results met expectations. Its order pipeline from existing customers remains robust. Additionally, the group is in advanced discussions with prospective clients from the server,  medical device, and consumer product spaces. We keep our forecasts, TP of RM4.05 and OUTPERFORM call.

Within expectations. PIE’s 1QFY23 core net profit came in at RM13.6m  (-27.7% YoY), representing 16% each of our full-year forecast and the full-year consensus estimate. We deem the results within expectations as 1Q is seasonally the weakest quarter for PIE.

Results’ highlights. YoY, 1QFY23 revenue grew 24.5% thanks to higher order volume across its customers, both new and existing ones.  The robust growth from its bread-and-butter electronic manufacturing services (EMS) segment (+41%) more than offset the decline in its raw wire and cable business (-23%). However, 1QFY23 core net profit declined 27.7% as the electricity tariff hikes took effect, coupled with higher administrative and distribution expenses.

Growth trajectory still intact. As per our usual observation, the group typically experiences higher provision for slow-moving inventory in the early part of the year. However, this provision could be reversed in subsequent quarters. Therefore, we remain sanguine on the group’s ability to deliver stronger performance moving forward. This would be driven by resilient orders from existing customers as well as Customer A  and Customer N which are involved in ASIC-based equipment and household entertainment products, respectively. Furthermore, the group is confident over securing potential new clients operating in the server,  medical device and consumer product space. In anticipation of this, PIE  has embarked on major renovation and expansion works at its Plant 5  (100k sq ft) and Plant 6 (275k sq ft).

Forecasts. Maintained.

Investment thesis. 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 maintain our TP of RM4.05 based 18x FY23F PER, which is in line with peers’ average. 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 foreign workers welfare by activists, and (iv)  unfavourable currency movements.

Source: Kenanga Research - 22 May 2023

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