PIE’s 1HFY23 results disappointed on reduced orders for highmargin consignment-based products, coupled with higher utilities and staff costs. It continues to engage with prospective customers in the server, medical device, and consumer product space. We cut our FY23-24F net profit forecasts by 21% each, reduce our TP by 11% to RM3.61 (from RM4.05) but maintain our OUTPERFORM call.

Below expectations. PIE’s 1HFY23 core net profit of RM25.2m (-7% YoY) came in below expectations, representing only 29% and 33% of our full-year forecast and the full-year consensus estimate respectively. The variance against our forecast was attributable largely to the deferment of orders from most customers.

Results highlights. YoY, its 1HFY23 revenue grew 9.9% on higher contributions from its EMS segment (+22%) which offset the weakness from the raw wire and cable business (-29%). Despite its revenue growth, 1HFY23 earnings eased 7% due to an unfavourable revenue mix, particularly, stemming from a significant deceleration in orders from Customer A which typically yielded better margins. Adding to that, its administration and distribution costs jumped 24% on the back of higher electricity tariffs and elevated labour wages.

New customer engagements. PIE said the slowdown that first started in June may persist over the next few months. We believe that this is attributable to customers moving away from keeping high stock levels to just-in-time inventory management on a tepid demand outlook due to the global economic slowdown. The group continues to engage with new potential customers and remains sanguine on securing a few clients in the server, medical device and consumer product space. The group will continue with its expansion plans, enlarging its Plant 5 (100k sq ft) and Plant 6 (275k sq ft).

Forecasts. We cut FY23-24F net profit forecasts by 21% each.

Consequently, we reduce our TP to RM3.61 (from RM4.05) based on an unchanged 18x PER (in line with peers’ average) as we roll forward our earnings base to FY24. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain OUTPERFORM.

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.

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 - 7 Aug 2023