UPDATE REPORT

Semiconductor and memory prices continued to soften into 3Q 19 whilst economic conditions in Malaysia and Singapore continue to deteriorate. The interest rate cuts around the region continue to support our cautious outlook that we noted in our previous report. Looking ahead, we remain cautious on the tech sector generally. On the bright side a weaker MYR may boost export margins. Also, there is some talk of increasing orders from China as that country seeks ways to a) reduce tariffs and b) control rising labour costs at home. Though management seems optimistic on next year’s prospects, our outlook is more cautious. PIE has a fairly clean balance sheet, but as above, growth prospects are being revised downwards in many of the largest economies.

INVESTMENT RISKS

Risks to our recommendation and target price include: i) a sharp reduction in consumer/business electronics demand, ii) a stronger USDMYR exchange rate, iii) an increase in the general level of interest rates, iv) labour shortages, and v) loss of key customers.

RECOMMENDATION

We have a HOLD recommendation on PIE with a fair value estimate of MYR 1.20. At current prices the shares seem fairly valued given the challenging outlook facing many listed exporters. Looking ahead, average ROE is likely to be maintained at levels within 6-9%, whilst P-BV stands on 1.3x trailing book value and 1.3x current year book value. PIE shares currently stand on a forward dividend yield above 3.0% on our updated dividend forecast. Should PIE demonstrate it can raise margins and substantially increase revenue in these difficult times, we would likely raise our target price and review our HOLD recommendation.

COMPANY PROFILE

PIE provides a one-stop contract electronic manufacturing service for the computer, electronics and telecommunication industries, including assembly of various cables, and it also tests various electronic products including bar code scanner and PCB assemblies. Major markets include Malaysia, Europe, the United States, and other Asia Pacific countries. Taipei-based Hai Hon Precision Industry Co Ltd is a substantial shareholder of PIE. 20% of PIE’s revenue is derived from wires & cables whilst 80% comes from original equipment manufacturing of electronic manufacturing services (EMS) for box-builds and semi box-builds, and barcode scanners. 90% of PIE’s revenues are exported either directly or indirectly.

Source: Wilson & York Securities Research - 15 Nov 2019