KEY INVESTMENT HIGHLIGHTS

• 1QFY20 earnings below expectation

• Earnings for the quarter plunged into a loss of RM2.5m as revenue fell by 33.6%yoy

• 2QFY20 earnings may be dampened by the Movement Control Order

• Downgrade to NEUTRAL with an adjusted TP of RM1.20 (previously RM1.60)

1QFY20 earnings below expectation. P.I.E. Industrial Bhd’s (PIE) core net profit (CNP) of RM2.0m missed ours and consensus’ earnings forecast. We have excluded inventories written down of RM4.3m Earnings for the quarter made up 4.4% of full year estimates.

Earnings for the quarter plunged into a loss of RM2.5m as revenue fell by 33.6%yoy. If we exclude the write-off, the CNP of RM2.0m was actually a huge improvement from RM0.5m a year ago. During the quarter, the Covid-19 pandemic and the US-China trade war had resulted in a drop in customer demand for its products and services. Sequentially, core net profit fell by -84.57%qoq as revenue dropped by 37.3%qoq.

2QFY20 earnings may be dampened by the Movement Control Order (MCO) as production and shipment were disrupted.

Management expects production to fully resume from June onwards if the pandemic is well contained. Looking pass the pandemic, PIE’s electronic manufacturing services (EMS) segment is expected to improve in the longer run premised on its vertically integrated manufacturing facilities. On top of that, we believe that it may also be a beneficiary of the US-China trade war. In the near-term though, outlook is clouded by any potential disruption in supply chain, weaker-than-expected demand, wild swing in foreign exchange rates as well as raw material prices.

Earnings for FY20E/FY21F revised by -25.2%/-11.9% respectively to reflect the uncertainties ahead. Subsequently, we expect CNP for FY20E/FY21F at RM35.4m and RM43.5m respectively.

Downgrade to Neutral with a revised TP of RM1.20 (previously RM1.60). Due to the downward revision in our earnings forecast, we think that capital gain in the near-term may be limited. Our TP is pegged to 13x PER FY20F EPS of 9.21sen. Estimated dividend yield is 4.7%. PIE’s net cash of RM167.4m as of end-March will be able to help it overcome any near-term headwind.

Source: MIDF Research - 1 Jul 2020