Despite lower turnover, PIE's 9MFY24 gross margin improved by nearly 4ppts to 9.3% due to an optimised client mix, though the rapid strengthening of the MYR increased forex losses, putting pressure on net profit. However, with currency volatility normalising, we expect stronger sequential performance in 4QFY24.

Looking ahead, PIE is on track to commence mass production for a new data centre client in CY25 and is exploring further opportunities in automotive, robotics, medical, and telecommunications sectors. We are maintaining our forecast for now, pending updates from the upcoming briefing. Target price remains at RM6.35 with an unchanged OUTPERFORM rating.

PIE's 9MFY24 net profit of RM35.8m (-22% YoY) was broadly in line with our expectations but fell short of the street's estimate, achieving 51% of our forecast and 41% of consensus projections, where we believe the key variance was due to the forex impact. Heading into 4Q, we expect a stronger sequential performance, bolstered by stabilising forex effects and increased production volumes from Customer A, supported by an improved IC supply and expanded dedicated floor space. Notably, this project operates on consignment basis, with Customer A supplying all materials while PIE handles the SMT process and final assembly.

Consequently, while revenue may appear modest, the contribution to the bottom line is significantly amplified.

YoY, 9MFY24 revenue declined by 21% to RM724m, largely due to reduced sales in the electronic manufacturing services (EMS) segment, as PIE strategically rationalised operations by trimming orders from lower-margin Customer N. The revenue contraction in EMS was partially offset by growth in raw wire & cable and wire harness product segments.

Despite lower turnover, PIE's GP margin rose nearly 4ppts to 9.3%, following an optimised client mix. PBT, however, decreased by 22%, impacted by reduced EMS sales and RM9.1m forex loss (vs. RM21m gain the prior year), resulting in a net profit decline of similar magnitude to RM36m.

QoQ, 3QFY24 revenue rose by 2%, though net profit dropped 49% to RM8.8m. This was primarily due to a lower PBT margin in the EMS segment, which contributed approximately 75% of total revenue, coupled with a higher forex loss of RM11.7m vs. a RM0.9m gain in the prior quarter.

Outlook. Our recent engagement with management suggests that PIE is on track to commence mass production for a newly secured client in CY25, following the successful completion of the first sample batch. This client will focus on server and switcher products for data centres.

Additionally, we understand that the group is in active discussions with prospective clients across the automotive, robotics, medical, and telecommunications sectors, though we have not yet factored these into our earnings model. We believe PIE's value proposition lies in its robust track record, positioning it as a highly sought-after EMS provider, particularly as Chinese companies accelerate their China+1 strategy to mitigate potential U.S. tariffs on Chinese imports.

Forecasts. We are maintaining our financial forecasts for now, awaiting further insights from today's results briefing.

Valuations. We maintain our TP at RM6.35 based on FY25F EPS pegged to an unchanged PER of 23.5x, 10% discount to AI server-related peer such as NATGATE (OP; TP: RM2.30). There is no adjustment to our TP based on ESG given a 3- star rating as appraised by us (see Page 4).

Investment case. We continue to like PIE for: (i) its comprehensive skill set, 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 and power tools to the latest DeFi equipment. Maintain OUTPERFORM.

Risks to our call include: (i) loss of orders from/non-renewal of contracts by its key customer, (ii) labour shortage and rising labour cost and (iii) unfavourable currency movements.

Source: Kenanga Research - 11 Nov 2024