INVESTMENT HIGHLIGHTS

• 1HFY18 earnings below expectations

• 2QFY18 net profit slid by 34.8%yoy to RM7.0m

• Trimmed our FY18F/FY19F estimates by -3.4%/-3.8%

• Maintain BUY with adjusted TP of RM1.88 (from RM1.95)

1HFY18 earnings below expectations. P.I.E. Industrial Bhd’s 1HFY18 (PIE) net profit of RM14.2m missed expectations, making up 30% of ours and consensus’ full year estimates. This is mainly due to the longer-than-expected shortage in component supply, which results in delay in deliveries. The company announced a DPS of 6.0 sen, which is within expectation.

Profit for the period declined by 60.6%yoy to RM14.2m as revenue fell by 15.1% to RM286.9m. The decline in revenue is due to the lower demand from its customers particularly from the electronics manufacturing services (EMS) segment (-16.0%yoy to RM277.9m) which is largely attributable to the shortage of raw material supplies. This is cushioned by the 31%yoy increase in trading sales to RM8.9m.

2QFY18 net profit slid by 34.8%yoy to RM7.0m in-line with the 19.6% decrease in sales to RM141.6m The decline in sales is due to the delay in deliveries to its customers because of the continual shortage in certain components. However, gross profit margin for the quarter has improved to 5.3% from 3.4% in 1Q although it is still compressed compared to the 10.6% recorded in 2Q17. This is attributed to operating inefficiencies as a result of the shortage of component supply. Versus 1QFY18, net profit for the quarter dipped by 3.3% in tandem with sales that were 2.5% lower.

We expect 2HFY18 to make up for the slow start in 1HFY18 as plant utilisation is estimated to increase to 90% from 75% earlier in the year. The production ramp up is supported by a few factors including customers trying to make up for the slow progression in the first half, new sources of supplies for the raw materials as well as the seasonally busier second half. On top of that, a strengthening ringgit bodes well for PIE’s sales. Every 10% strengthening in USD rate will increase its PBT by ~13%.

FY19 expected to be better than FY18 as we anticipate some of the slow deliveries in FY18 to spill over to next year. On top of that, we understand that the new contracts related to industrial printing products and other commercial products contracts that the company is negotiating are going well.

However, we trimmed our FY18F/FY19F earnings by -3.4%/-3.8% in view of the prolonged issue with supply which subsequently affect their operational efficiencies and margins. We expect the strengthening USD to partially offset the weakness in earnings recognition.

Maintain BUY with adjusted TP of RM1.88 (previously RM1.95) due to the changes in our earnings estimates. Our TP is based on unchanged valuation method of 15x PER pegged on FY18 EPS of 12.5 sen. The company is in a net cash position of RM96.2m and dividend yield is expected at 3.7%.

Source: MIDF Research - 20 Aug 2018