Kenanga Research & Investment

P.I.E. Industrial - A Slice of AI Pie

Publish date: Thu, 18 Apr 2024, 10:03 AM

PIE, we understand, via referral from a key shareholder, has secured a new sizeable AI server client that will take up the entire Plant 6 (c. 280k sq ft), its largest facility. We understand that PIE will be the new customer’s sole contract manufacturer outside of China.  We raise our FY25F earnings forecast by 10%, lift our TP by 69% to RM6.75 (from RM4.00) and reiterate our OUTPERFORM call.

We understand that PIE, via referral from a key shareholder, has secured a new sizeable AI server client that will take up the entire Plant 6 (c. 280k sq ft), its largest facility. We also understand that this is part and parcel of the key shareholder’s diversification strategy. A fast-track project, the qualification processes will be completed followed by small production before the year is out, paving the way for mass production in 2025. Ultimately, Plant 6 will produce approximately one-third of the new customer’s global volume.

Separately, we understand that Plant 5 (approximately 100k sq ft) has been completed and is in the final stages of equipment installation. This entire plant will be dedicated to Customer A and is set to commence operations by the end of May, doubling the floor space allocation for Customer A, which currently occupies the entirety of Plant 3. The increased demand is driven by new model launches from Customer A, as well as a robust order pipeline, aligning with the optimism in the DeFi market.

The group has also successfully on-boarded four smaller customers with products related to: (i) drone device for light shows, (ii) diagnostic device for oral cancer, (iii) smart home, and (iv) industrial sensors. The drone device and smart home customer have begun production with the diagnostic device for oral cancer to follow in March. Contributions from these new customers are expected to collectively account for c.8%−12% of total group revenue in FY24.

Forecasts. We raise our FY25F net profit forecast by 10% to account for higher contribution from the new customer related to AI servers.

Valuations. Correspondingly, we raise our TP by 69% to RM6.75 (from RM4.00) based on a rolled-forward FY25F EPS pegged to a higher PER of 23.5x (from 18x) to reflect a premium for AI proxy, in-line with AI- related peer such as NATGATE (OP; TP: RM1.58). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. 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 and power tools to 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 treatment of migrant workers by activists, and (iv) unfavourable currency movements.

Source: Kenanga Research - 18 Apr 2024

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