Kenanga Research & Investment

P.I.E. Industrial - Growth Trajectory Intact

Publish date: Tue, 23 May 2023, 10:45 AM

PIE shed light on its margin contraction in 1QFY23, i.e. stemming from plant refurbishment costs, increased depreciation on new  equipment, and higher electricity expenses. To mitigate rising  electricity cost, the group has initiated solar panel installations  across five plants, covering 70% of energy needs. Meanwhile, the  recent onboarding of clients in the medical devices and drone  industries is expected to drive margin recovery. We maintain our  forecasts, TP of RM4.05 and OUTPERFORM call.

We came away from an engagement with PIE yesterday feeling  reassured of its prospects. The key takeaways are as follows.

  1. PIE clarified that the contraction in its 1QFY23 margins was mainly  attributable to: (i) higher maintenance and refurbishing cost incurred  for plant readiness in preparation of new customer acquisitions, (ii)  increased depreciation from the two recently purchased SMT lines,  (iii) higher electricity cost that that was implemented earlier this year,  and (iv) shift in product mix with higher revenue proportion from Customer N, which yielded relatively lower margins, further  influenced 1QFY23 result.
  2. As part of its proactive measure to tackle the escalating electricity  cost, the group has kickstarted the installation of solar panels across  five of its plants, with completion targeted by the end of 2023. Once  finalised, the green energy generated is estimated to cover 70% of  the group’s energy consumption, not only offsetting the increase in  cost but yielding additional savings.
  3. In spite of the challenging climate within the tech space, the group  has experienced positive developments in its discussion with  prospective clients. It has successfully secured two new US-based  clients which are involved in medical product and drone equipment.  These clients are expected to contribute positively in FY24, with the  possibility of commencing pilot production by the end of FY23. Beyond this, PIE remains actively engaged in discussions with  several other clients seeking to leverage the group's capabilities. To  accommodate the anticipated growth, it is getting its Plant 5 (c.100k  sq ft) up and ready by 3QFY23 followed by Plant 6 (c.280k sq ft) in  1QFY24, which will be its biggest plant.

Forecast. Maintained.

We maintain our TP of RM4.05 based on unchanged 18x FY23F, in line  with peer’s forward average. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We continue to like PIE for: (i) its comprehensive skillset, making it a topchoice 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. 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 - 23 May 2023

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