INVESTMENT HIGHLIGHTS

• 1HFY19 earnings largely in-line

• Cumulative CNP improved by 4.0%yoy to RM8.68m

• Recovery momentum may continue into 2HFY19

• Upgrade to BUY with an adjusted TP of RM1.27 (previously RM1.47).

1HFY19 earnings largely in-line. P.I.E. Industrial Bhd’s (PIE) core net profit (CNP) of RM8.68m was largely within ours and consensus’ full year estimates at 23% and 22% respectively. We have excluded net addition of impairment losses and net reversal of inventories written down amounting to -RM0.12m from the CNP.

Cumulative CNP improved by 4.0%yoy to RM8.68m as revenue increased by 15.8% to RM332.2m. We note that the lower profit margin for the same comparative period is mainly due to the new project for a high volume product which led to operational inefficiency particularly in the first quarter. But based on the second quarter results, the operating margin has improved compared to the preceding quarter. We believe that the operational efficiency will further improve in the coming quarters, which should result in better profit margins.

2QFY19 CNP up by 11.2%yoy to RM8.14m supported by revenue that jumped 27.5%yoy to RM180.58m. The improvement can be largely attributed to the higher demand from existing customers for the electronics manufacturing services (EMS) segment. EMS sales for the quarter increased by 47.2%yoy to RM147.64m but is offset by lower raw wire and cable revenue that declined by 12%yoy to RM27.51m. Sequentially, CNP surged to RM8.14m from RM0.54m qoq. Revenue also improved by 19% compared to the previous quarter. The qoq improvement van be attributed to higher sales, recovery in margins and better product mix.

Recovery momentum may continue into 2HFY19. Based on the recovery in margin for 2QFY19, we expect PIE’s profit margin to improve further in the coming quarters. This is premised on better product mix, favourable exchange rates and improved operational efficiency. We believe that management will be more cautious with new project selection following its experience with the new high volume project that it started in 1QFY19. As such, we expect stronger quarters ahead.

Upgrade to BUY with an adjusted TP of RM1.27 (previously NEUTRAL with TP of RM1.47). We leave our earnings estimates unchanged as we believe that PIE’s 2HFY19 earnings will be stronger premised on improved operational efficiency and profitability. However, we have reduced our PER valuation from 15x previously to 13x in tandem with the lower forward PER of other local EMS players that average at ~13.0x. This is also closer to PIE’s 10- year average PER of 12.5x. Hence, our TP of RM1.27 is derived from 13x PER FY19E EPS of 9.79 sen. We think that valuation is appealing now after the stock fell to a three-year low. At current price, it is also trading at about -1.0 SD below its five-year average. Meanwhile, we believe that earnings recovery is underway. Topping that, the company continues to be in a net cash position of RM93.6m and dividend yield is expected at 4.3%.

Source: MIDF Research - 19 Aug 2019