PIE’s plan to gear up for mass production for a new client in CY25 at its largest facility, Plant 6, is on track. This will start with assembly before progressing to higher-margin SMT production. It has expanded capacity for Customer A, where its improved IC supply is expected to boost earnings. Additionally, PIE is focusing on higher- margin clients and exploring new business opportunities. We have reduced FY24/FY25 net profit forecast by 22%/6% and lowered our TP to RM6.35. but maintain our OUTPERFORM call.

We recently met with PIE's management and remain optimistic about its promising outlook. The key takeaways from the meeting are as follows:

1. PIE is on track to start with a mass production for its recently secured client (related to server and switchers for data centre) in CY25 post completion of the first batch of samples. This new client will occupy the entire Plant 6 (c. 280k sq ft), its latest and largest facility. PIE is planning to start with assembly services first, but will eventually move to higher margin Surface Mount Technology (SMT) production thereafter. Upon a full ramp-up, the Plant 6 will produce approximately one-third of the new customer’s global volume.

2. PIE has continued to expand its floor space to accommodate the growing demand from Customer A. Since June 2024, the group has fully dedicated Plant 5 (c.100k sq ft) to Customer A and plans to extend it by another 70k sq ft at the rear to meet future demand. Combined with the fully utilized Plant 3 (around 80k sq ft), this represents a threefold increase in floor space to about 250k sq ft. The expansion is well-timed, as the easing of the IC shortage is expected to result in stronger sequential performance with loading volumes for Customer A moving towards optimal levels. Notably, PIE's 2QFY24 net profit surged 78% QoQ, despite flat revenue, mainly due to improved IC supply from Customer A. The project operates on consignment basis, where Customer A supplies all materials, and PIE handles the SMT process and final assembly. As a result, while revenue may appear modest, the impact on the bottom line is significantly more pronounced.

3. The group is currently rationalizing its operations by reducing orders from lower-margin customers to allocate capacity and resources for higher-margin clients. Additionally, it is actively engaging in discussions with several potential new customers in the automotive, robotics, medical, and telecommunications sectors. We have yet to impute any expectations in our earnings model. We believe PIE’s value proposition lies in its strong track record, positioning it as a highly sought-after EMS vendor, especially as Chinese businesses accelerate their China+1 strategy to mitigate potential punitive US tariffs on Chinese imports.

Forecasts. Reduced FY24F/FY25F net profit by 22%/6%, respectively, after removing contributions from lower-margin customer.

Valuations. We lowered our TP to RM6.35 (from RM6.75 previously) based on FY25F EPS pegged to an unchanged PER of 23.5x, and 10% discount to AI server-related peer such as NATGATE (OP; TP: RM2.30). 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 skill set, 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. 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 and (iii) unfavourable currency movements.

Source: Kenanga Research - 19 Sep 2024