PIE’s 1QFY24 results met expectations. Its 1QFY23 core net profit fell 28% YoY due to seasonal factors coupled with shortages of integrated circuits (IC) which have since been resolved. Meanwhile, its new Plant 5 will go online next month as planned. We maintain our forecasts, TP of RM6.75 and OUTPERFORM call.

Within expectations. PIE’s 1QFY24 core net profit of RM9.8m (-28% YoY) only made up 12% and 11% of our full-year forecast and the full- year consensus estimate, respectively. However, we consider the results within expectations given the seasonally weak 1Q and shortages of integrated circuits (IC) during 1Q, which have since been resolved, paving the way for a ramp-up in production.

YoY, its 1QFY24 revenue fell 28% owing to a 31% decline in the top line performance of its bread-and-butter EMS segment (which typically contributes c.80% to group revenue) while its raw wire & cable business saw a 19% contraction on lacklustre demand from the PC peripheral market. We understand that the weak performance in the EMS segment was primarily due to reduced loading volumes from Customer A, caused by IC shortages. As a result, only 30%-40% of the required orders were delivered during the reported quarter. We believe it is important to distinguish between issues in production process and supply of raw materials, and it was the latter in this case, i.e. Customer A’s under- estimation of IC requirements. Correspondingly, its core net profit declined by 28%.

QoQ, its 1QFY24 top line contracted 20% from a high base in the preceding quarter during the year-end peak period. Its core net profit fell by a steeper 65% due to loss of operating scale on lower production and normalisation of tax rate.

Trending upwards. Looking ahead to 2QFY24, we anticipate a stronger quarter sequentially as the resolution of the IC supply issue will restore production for Customer A to optimal levels. In addition, renovation works at Plant 5 (c.100k sq ft) have been completed and it is in the final stages of equipment installation. Dedicated entirely to Customer A, the plant is set to commence operations by Jun 2024, and will double the floor space allocation for Customer A, which currently occupies the entire Plant 3. Furthermore, the group has begun producing for four smaller customers’ products related to: (i) drone device for light shows, (ii) diagnostic device for oral cancer, (iii) smart home, and (iv) industrial sensors. These should add c.8%-12% to FY24F revenue.

Forecasts. Maintained

Valuations. We keep our TP of RM6.75 based on an unchanged 23.5x FY25F PER, 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 thesis. We continue to like PIE for: (i) its comprehensive skill sets, 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.

Maintain OUTPERFORM.

Risks to our call include: (i) loss of key orders, (ii) non-renewal of contracts by key customer, (iii) labour shortage and rising labour cost, (iv) negative reviews on foreign workers welfare by activists, and (v) unfavourable currency movements.

Source: Kenanga Research - 20 May 2024