PIE’s 1HFY24 results met expectations. Its net profit rose 7.5% YoY thanks to effective cost control. We learned that integrated circuit (IC) supply constraints from Customer A have eased. This, coupled with the timely commencement of Plant 5, should optimise production for Customer A, paving the way for a stronger 2HFY24. We maintain our forecasts, TP of RM6.75 and OUTPERFORM call.

PIE’s 1HFY24 core net profit of RM27.1m (+7.5% YoY) made up 32% and 30% of our full-year forecast and the full-year consensus estimate, respectively. However, we consider the results within expectation as we expect a stronger 2H in the absence of IC shortages (which weighed on production from 1QFY24).

YoY, its 1HFY24 revenue declined 23% owing to a 27% drop in its core EMS segment (c.80% of group revenue). This was primarily due to reduced contribution from Customer N, stemming from issues within the supply chain—not related to PIE's SMT process and functional testing, but rather from another contract manufacturer responsible for the final assembly process. Additionally, the lingering impact of IC shortages from 1QFY24 affected the average run rate for Customer A in 1HFY24. It’s important to highlight that the raw material supply issue arose from Customer A’s under-estimation of IC requirements, not from any manufacturing process issue on PIE’s part. Despite the revenue decline, net profit increased by 7.5% due to effective cost control measures.

QoQ, its 2QFY24 revenue remained flat, but net profit surged by 77% due to improved IC supply from Customer A. Note that Customer A’s project operates on a consignment basis, where all materials are supplied by the customer, and PIE is responsible solely for the SMT process and final assembly services. As a result, while revenue may appear modest, the positive impact on the bottom line is significantly more pronounced.

Stronger 2HFY24 intact. The newly renovated Plant 5 (c.100k sq ft), fully dedicated for Customer A, has begun operations in June 2024. This is timely given the easing of IC shortage which should lead to a stronger quarter sequentially as the loading volume for Customer A is expected to move towards optimal levels. Meanwhile, further expansion works are happening concurrently for Plant 5 to expand it to c.170k sq ft, bringing the total floor space dedicated to Customer A to c.250k sq ft, including existing Plant 3 (c.80k sq ft).

Forecasts. Maintained

Valuations. We keep our TP of RM6.75 based on an unchanged 23.5x FY25F PER, in line with AI-related peers such as NATGATE (OP; TP: RM2.06). There is no adjustment to our TP based on ESG given a 3- star rating as appraised by us (see Page 4).

Investment thesis. We continue to like PIE for: (i) its comprehensive skill sets, making it a top-choice EMS provider for MNCs, (ii) various competitive advantages it enjoys as a unit of Foxconn, and (iii) its diversified and evolving client base, from those involved in communication devices, power tools and the latest DeFi equipment.

Maintain OUTPERFORM.

Risks to our call include: (i) loss of key orders, (ii) non-renewal of contracts by key customer, (iii) labour shortage and rising labour cost, (iv) negative reviews on foreign workers welfare by activists, and (v) unfavourable currency movements.

Source: Kenanga Research - 13 Aug 2024