This article first appeared in The Edge Financial Daily on July 13, 2018
PIE Industrial Bhd
(July 12, RM1.45)
Maintain outperform with a higher target price of RM2: Recall that first quarter ended March 31, 2018 (1Q18) sales dropped 10%, with core net profit (CNP) plunging sharply to RM1 million, hampered by both unfavourable foreign exchange (forex) as well as industry-wide component shortages.
We gather that if not for these issues (hence operational deleveraging), decent top-line growth alongside mid to high single-digit net profit (NP) margin would have been achieved, translating into much better CNP.
Management noted that while 2Q18 should continue to see drawback from such issues, seasonal ramp-up alongside higher allocation from its telecommunication, bar-code scanners and raw cable customers should help the group achieve a mid to high single-digit top line growth year-on-year (y-o-y) for financial year ending Dec 31, 2018 (FY18).
To fend off such systemic impact, the group is also looking at new contracts by allocating higher capital expenditure (capex) allocation of circa RM15 million in FY18 (versus previously guided RM5 million, for more surface mounting technology (SMT) lines).
As the new contracts such as industrial printing and production, as well as medical segment, involve more complicated manufacturing processes with sizeable volume potentially, we believe the margins should be higher and hence, should be able to help the group to weather through the weaker dollar (or stronger ringgit) environment.
Mass production could be seen earliest by 4Q18 with full earnings contribution in FY19 to comfortably support our forecast two-year revenue/CNP compound annual growth rate of 11%/14% with expectation of the subsiding component shortage issue.
On labour supply, we understand that the group has secured enough quotas for the coming new contracts, with circa 1/3 utilisation thus far.
To mitigate the potential minimum wage hike, the group is in the midst of relocating labour-intensive jobs to Thailand.
Meanwhile on the currency front, management noted that it is comfortable with the current rate of circa RM4.03 per US dollar, as long as there is no high volatility.
For FY18/FY19, we have conservatively assumed RM3.90 per US dollar as the base case. Based on our sensitivity analysis, every 1% fluctuation in the US dollar from our base case assumption of RM3.90 per US dollar will impact forward NP by circa 2%.
Post-meeting, while we made no changes to our FY18/FY19 earnings, we roll over our valuation base year to FY19 based on a 14 times forward price-earnings ratio (PER), which is electronic manufacturing service (EMS) players’ three-year average forward PER.
We see good value proposition following the overdone share price correction, with its forward PER at only 12.4 times, a 16% discount to its closest EMS peers which is trading at 14.7 times PER.
Risks to our call are slower-than-expected sales, loss of orders from its key customers, severe component shortages, labour issues, and adverse currency translations. — Kenanga Research, July 12