INVESTMENT HIGHLIGHTS

• 1QFY19 earnings below expectations

• CNP for the quarter fell 47.4%yoy to RM0.54m

• New sales may take time to be translated into profit

• FY19E/FY20F earnings cut by -21.2%/-14.0%

• Downgrade to NEUTRAL with an adjusted TP of RM1.47

1QFY19 earnings below expectations. P.I.E. Industrial Bhd’s (PIE) core net profit (CNP) of RM0.54m was well below ours and consensus’ expectations at 1% of full year estimates respectively. We have excluded net reversal of impairment losses and inventories write down amounting to RM0.23m from the CNP.

CNP for the quarter fell 47.4%yoy to RM0.54m even though revenue increased by 4.4%yoy to RM151.7m. This is mainly due to the inefficiency resulted by new products from new customers that are of high volume but low margin. Due to the new projects, the company had incurred higher than expected set up cost that affected its efficiency thus lowering profitability.

New sales may take time to be translated into profit. We understand that the company is in talks with several other new potential customers for new jobs as a result of the US-China trade war that led to manufacturers searching for alternatives in this region. We think that the company may have to go through similar learning curves for these new projects depending on the complexity and selling prices of the new products. Hence, we expect some transition time for the company to turn the new orders into a more normalised level of profitability. We understand that management may be negotiating for better selling prices to mitigate the low profitability as well.

FY19E/FY20F earnings cut by -21.2%/-14.0% to RM37.6m/RM47.3m respectively. This is after taking into consideration the low margin, high volume project as well as the time required to reach an optimal level in production given the new projects that may come on line this year. Moreover, raw material costs for its raw wire and cable division are expected to increase following the climbing trend of PVC and copper prices. This may be cushioned by the easing of electronic component supply that the company experienced last year.

Downgrade to NEUTRAL with an adjusted TP of RM1.47 (previously BUY with TP of RM1.86). Our TP is based on unchanged 15x PER FY19E EPS of 9.79 sen following our adjustment in earnings. We are turning more cautious with the new jobs until its operational efficiency normalises. On the flipside, the company continues to be in a net cash position of RM149.3m and dividend yield is expected at 3.5%.

Source: MIDF Research - 27 May 2019