KEY INVESTMENT HIGHLIGHTS

• 1H20 earnings missed expectations

• PBT remains in the red at -RM0.42m as revenue fell by - 38.3%yoy in 2Q20

• Earnings recovery expected through FY21

• EMS activities to steadily pick up in the long run

• Maintain NEUTRAL with TP of RM1.20

1H20 earnings missed expectations. P.I.E. Industrial Berhad’s (PIE) core net profit (CNP) of RM8.63m came in below both our and consensus expectations, accounting for only 30.0% and 41.6% of full year estimates respectively. To note, we have excluded inventories write-down and impairment losses of RM9.2m in the CNP calculations.

PBT remains in the red at -RM0.42m as revenue fell by - 38.3%yoy in 2Q20. The group’s dismal financial performance was mainly attributable to the Covid-19 pandemic in which has triggered a sudden drop in customer demand for its products and services. Plus, the group was only able to restart their production in May with a lowefficiency rate due to lack of workforce. Sequentially, the losses showed slight improvement from -RM1.83m in prior quarter due to higher demand recorded for electronics manufacturing services (EMS) but were partly offset by lower revenues registered from the remaining divisions.

Earnings recovery expected through FY21. As movement restrictions have eased further since June, we gather that PIE is now running their production at full capacity as their workforce has increased back to pre-MCO level. While we are also aware that the management expects operation to continue at full capacity in order to clear backlogs, some of the challenges to be considered would be labour shortages and disruption to their supply chain due to prevailing lockdowns in some of the suppliers’ countries. Taking all these into consideration, we anticipate the accumulated earnings for FY20 to drop but cautiously optimistic that recovery would ensue through FY21.

EMS activities to steadily pick up in the long run. We note that the management expects orders under EMS activities to increase in the long run due to its fully built up vertical integrated manufacturing facilities coupled with more demands coming in from overseas customers as a beneficial result of the USA-China trade war. Thus, moving forward, we postulate that the EMS segment can help to partially cushion the weaker financial performance of the other segments. The risks to our outlook include any global development of Covid-19, disruption in supply chain, and wild fluctuations in foreign exchange rates.

Earnings estimates. Factoring in the below-than-expected earnings this quarter, we are revising downward our earnings estimates for FY20E/FY21F/FY22F to RM33.7m, RM37.4m and RM43.4m respectively.

Dividends. We also took a more conservative view on the dividend payout and trimmed our FY20E DPS to 5.0sen from 6.0sen.

Maintain Neutral with TP of RM1.20. Our TP is premised by pegging its FY20EPS of 8.79sen to PER of 13.7x (from previous 13.0x) which is about 1.0x SD-premium to the group’s two-year historical average. Estimated dividend yield is +3.6%. In addition, we posit that the group’s healthy cash balance of about RM155.6m as of end-June will be able to assist the group to overcome any short-term headwinds.

Source: MIDF Research - 17 Aug 2020