Valuation / Recommendation

Results were below expectations, achieving 25.5% and 16.6% of our full year revenue and profit forecasts for FY23F. 1Q23 revenue was lower qoq (-2.6%), higher yoy (+24.6%) due to higher demand for EMS but partly offset with lower sales from raw cable and wire harness products.

We recommend a HOLD on PIE with a TP of RM3.41 based on FY24F EPS 21.3 sen and PE of 16x which is in line with the 10-year average. While we like the stock for its attractive growth prospects, and diversified customer base, we think that a slow down in business of its customers will impact its profitability in the near term.

Investment Highlights

Proven track record and strong support from Foxconn. PIE was able to maintain profitable since inception, achieving a 10-year revenue CAGR of 11.4% from FY12 to FY21. Operations were unaffected during the Covid-19 pandemic as the company was classified under essential services. With the strong support from Foxconn Technology Group, which is PIE’s indirect major shareholder, the company can benefit from its network to improve its profit margins by leveraging on the raw materials.

Strong orders from existing customers. Customer N was secured in FY20, involved in the video games business. A full-year revenue contribution from this customer was realised in FY21, contributing approximately 40% to total revenue, allowing the company to achieve a record-breaking revenue above RM1bn. As of Feb 2023, 8 SMT lines had been commissioned for this customer. With increased capacity and smoother production arising from more consistent volume from the customer, we expect the customer to contribute approximately 35% to revenue in FY23.

The company dedicated plant 3 with a floor space of 120,000 sq ft and 6 SMT lines to a new customer namely Customer A, involved in the supercomputing cloud business secured in FY21. Customer A currently contributes approximately 7% to PIE’s total revenue. The company plans to dedicate plant 5 which has a floor space of 100,000 sq ft to this customer. Plant 5 is currently under renovation, expected to complete within 3Q23. With plant 5 ready, this will double its capacity for Customer A.

We expect higher contribution from Customer A in FY23 on the premise of increased capacity and higher orders, and we opine that this could potentially catalyse PIE’s earnings moving forward, driven by higher margins with the consignment of raw materials. Orders from customer N and A remained strong with its SMT lines running at full utilisation rate, and we do not rule out any possibilities of further expansion by PIE to cater for more orders from its existing and pipeline of customers.

Capacity expansion. The company is currently expanding its plant 6 by constructing a 2nd building next to the existing plant with a built up area of 155,000 sq ft, expected to complete by end of 2023. The expansion will increase plant 6’s built-up area to 270,000 sq ft and will be able to house more than 30 SMT lines for its existing and pipeline of new customers.

Arrival of more workers. In tandem with the expansion plans, the company brought in additional foreign workers which arrived in 3Q22. The additional workers replaced some inefficient existing workers to produce higher productivity and output. Running at double shifts on 24 hours a day, we expect RM80m worth of backlog orders to be cleared by 1H23.

Risk factor. Fluctuation of raw material prices and labour shortages.

Source: Mercury Securities Research - 23 May 2023