INVESTMENT HIGHLIGHTS

• 9MFY17 earnings below expectation

• 3QFY17 net profit -59.4%yoy due to bad debt and higher opex

• FY17F/FY18F earnings cut by -11.8%/-13.6%

• Maintain Neutral with revised TP of RM2.16

9MFY17 earnings below expectation. P.I.E. Industrial Bhd’s (PIE) core profit came in below expectation, making up 64% and 58% of ours’ and consensus’ full year forecast. There is a one-off provision for bad debt in 3QFY17 amounting to RM11.2m, which is expected to be recovered in the coming quarter. The lower-than-expected YTD profit is mainly due to the prolonged shortage in raw material, which resulted in lower gross profit margin and lower production efficiency. No dividend was declared for the quarter.

3QFY17 net profit -59.4%yoy due to bad debt and higher opex. As mentioned, PIE has made a provision of RM11.2m during the quarter as one of its customers’ encountered a technical problem in their new receiving system, which resulted in a deferment in payment to PIE. We expect the company to write back the bad debt in the next quarter once the customer resolves the technical issue. Also dampening the 3QFY17 performance is higher opex, which is attributed to higher raw material costs and fixed costs.

Ytd profit +88.2%yoy due to higher sales. However, its 9MFY17 profit has improved yoy, having surged 88.2% to RM24.2m from RM12.8m a year ago as revenue jumped by 28.6% to RM496m from RM385.8m previously. This is mainly due to contribution from new contracts accompanied by favourable exchange rates, higher scrap sales and reversal of slow moving inventories in the previous quarters.

FY17F/FY18F earnings cut by -11.8%/-13.5%. We reduce our earnings estimates to RM49.0m in FY17F and RM55.2m in FY18F (from RM55.6m and RM63.8m) as we factor in lower sales and higher raw material costs. We have reduced our sales forecast in FY17F/FY18F by -7.6%/-12.9% to RM664.3m/RM730.8m. This is in anticipation of slower delivery largely due to the shortage in raw material supply. As a result, our DPS estimates have been revised to 6.4sen/ 7.2sen in FY17F/FY18F.

Maintain Neutral with lower TP of RM2.16 due to the revision in our earnings estimates. We maintain our valuation method of 15x PER pegged on FY18 EPS of 14.38 sen, which resulted in the revised TP of RM2.16 from RM2.49 previously. We are neutral on the stock as its FY17 net profit (estimated at RM49.0m) is unlikely to match its previous record high of RM57.6m made in FY15. However, its balance sheet is still sturdy with a net cash of RM79.8m. We expect the company to pay out 50% of its profit as dividend, which will translate into a decent yield of 3.5%.

Source: MIDF Research - 7 Nov 2017