• MYR4.20 FV based on 17x FY23F P/E. PIE Industrial should ride on the structural demand growth for consumer electronics products, video game consoles, data servers, as well as the 12th Malaysia Plan GDP target for Malaysia’s E&E industry. Its strong growth potential (3-year CAGR of 21.1%) is underpinned by the expansion of its floor space to house new customer projects. This, coupled with its margin growth and net cash position, compels us to believe that its 1-year forward P/E of 14x is attractive, vs the peer average of 17.7x.

• Existing customers have filled the pipeline. Orders from these customers remain robust, in tandem with the demand for electronics manufacturing services (EMS), of which the global market size is expected to grow to USD797.9bn in 2029, from USD504.22bn this year – implying a CAGR of 6.8% (Figure 1).

• New customers to further boost revenue growth. PIE is in a sweet spot due to the prolonged US-China trade war, as some Chinese companies have been pressured to relocate their manufacturing plants overeas (ie ex- China). PIE secured Customer R (for consumer robotic products) in 4Q21, and a Chinese supercomputing cloud customer (Customer A) for level 10 box built on its application-specific integrated circuit (ASIC) hardware. Customer A has identified PIE as its preferred Malaysia vendor, which is a testament of its capability to handle the manufacturing complexity required. Subsequently, we expect to see full-year revenue recognition from Customers R and A in FY22 – which allows PIE to book higher margins.

• Strong demand fuelled expansion. In view of the surging demand, we understand that PIE has almost fully utilised its current capacity. It has taken back its fifth factory, which was previously leased out (120k sqft of floor area) to cater to Customer A, and the renovation is taking place at the time of writing. We expect this new factory to be filled up completely by 4Q22. In addition, its sixth factory is under renovation and expansion – this facility will be ready by 4Q22 while PIE will end the lease with its tenant in the seventh factory by Feb 2023. The addition of these two factories is expected to bring about a 25% increase in space capacity for PIE. Moreover, as it already has obtained approvals for a few hundred of foreign workers, the Group expects foreign workers to come on-board in batches until September – which is sufficient to fuel its growth plan for FY22.

• Our fair value of RM4.20 is based on 17x target P/E on FY23F earnings, supported by a 3-year CAGR of 21.1%. The valuation is on par with its 5- year average trailing P/E for PIE, and comparable to the EMS peers. At 11.7% and 5.9%, its ROE and NPM are superior to the industry averages of 9.2% and 4.5%. Also, earnings growth should be maintained into FY22- 23F – attributed to the overall industry landscape, capacity expansion plan, client stickiness, engineering know-how and operating efficiency.

• Key risks. Labour shortages, order fluctuations, and loss of orders from major customers.

Source: RHB Research - 8 Aug 2022