KUALA LUMPUR (Aug 22): Phillip Securities has halved its target price (TP) for Cape EMS Bhd (KL:CEB), whose share price saw a sharp 60% decline over the past month, to RM0.60 from RM1.70 previously, after an earnings downgrade.

The reduction comes on the back of significant earnings forecast cuts, driven by slower-than-expected production ramp-up for Cape’s new light electric vehicle (EV) business and increased operating costs.

“We cut our earnings forecasts by 36%-41% to reflect the slower-than-anticipated production ramp-up for its new light electric vehicle business and margin pressures from increased operating costs,” said Phillip Securities in a note.

Philip Securities also noted that CEB's EBITDA margin in 2Q24 fell to 12%, its lowest since its listing, compared with the average run-rate of 16% over the past two quarters due to additional costs associated with new customers and higher freight charges.

Although the electronic manufacturing services (EMS) provider’s long-term outlook is still strong due to global supply chain changes caused by geopolitical tensions, short-term uncertainties have led to adopting a more cautious valuation, according to the research house.

Despite achieving its highest-ever quarterly revenue of RM167 million in 2Q24, reflecting an 8% increase quarter-on-quarter (q-o-q) and a 37% rise year-on-year (y-o-y), Cape’s core net profit fell by 14% q-o-q and 21% y-o-y to RM9 million due to weaker margins.

Its revenue growth was driven by improved loadings from wireless communication and electronic cigarette customers, as well as initial contributions from the newly acquired iConn and the new EV business.

Besides, Cape’s 6M24 earnings amounted to RM20 million, down 16% y-o-y, which accounted for only 33% of Philip Securities' full-year estimates and 28% of consensus forecasts.

“The results fell short of our expectations due to higher-than-expected operating costs and additional expenses incurred related to its new customers,” it said.

Despite the earnings miss and margin pressures, Philip Securities maintained its ‘buy’ call, citing the stock's attractive valuation at the current price level.

“After a sharp 60% share price correction over the past month, Cape is trading at 8x 2025 PE, indicating value at the current price,” it added.

Nevertheless, downside risks remain, including weaker-than-expected customer orders, a longer-than-expected production gestation period, and ongoing margin pressures.

On Tuesday, the company reported that the Employees Provident Fund (EPF) had disposed of six million shares in the company. The company' share price has fallen from 71 sen on July 26, when EPF bought a block of 3.5 million shares, to 43 sen on August 15, the day it sold the six million shares.

At time of writing, Cape EMS’s share price was down 0.5 sen or 1.18% at 42 sen, valuing the company at RM416.64 million.

https://www.theedgemarkets.com/node/723789