This article first appeared in The Edge Financial Daily on August 20, 2019

PIE Industrial Bhd 
(Aug 19, RM1.15)

Upgrade to buy with a lower target price (TP) of RM1.27: PIE Industrial Bhd’s first half of the financial year 2019 (1HFY19) earnings largely in-line with its core net profit (CNP) of RM8.68 million was largely within our and consensus’ full-year estimates at 23% and 22% respectively. We have excluded net addition of impairment losses and net reversal of inventories written down amounting to RM120,000 from the CNP.

Cumulative CNP improved by 4% year-on-year (y-o-y) to RM8.68 million as revenue increased by 15.8% to RM332.2 million. We note that the lower profit margin for the same comparative period is mainly due to the new project for a high volume product which led to operational inefficiency particularly in the first quarter (1Q). 

But based on 2Q results, the operating margin has improved compared with the preceding quarter. We believe that the operational efficiency will further improve in the coming quarters, which should result in better profit margins.

2QFY19 CNP up by 11.2% y-o-y to RM8.14 million supported by revenue that jumped 27.5% y-o-y to RM180.58 million. The improvement can be largely attributed to the higher demand from existing customers for the electronics manufacturing services (EMS) segment. EMS sales for the quarter increased by 47.2% y-o-y to RM147.64 million but is offset by lower raw wire and cable revenue that declined by 12% y-o-y to RM27.51 million. 

Sequentially, CNP surged to RM8.14 million from RM540,000 quarter-on-quarter (q-o-q). Revenue also improved by 19% compared with the previous quarter. The q-o-q improvement can be attributed to higher sales, recovery in margins and better product mix.

Recovery momentum may continue into 2HFY19. Based on the recovery in margin for 2QFY19, we expect PIE Industrial’s profit margin to improve further in the coming quarters. This is premised on better product mix, favourable exchange rates and improved operational efficiency. 

We believe that the management will be more cautious with new project selection following its experience with the new high volume project that it started in 1QFY19. As such, we expect stronger quarters ahead.

We upgrade to “buy” with an adjusted TP of RM1.27. We leave our earnings estimates unchanged as we believe that PIE Industrial’s 2HFY19 earnings will be stronger premised on improved operational efficiency and profitability. 

However, we have reduced our price-earnings ratio (PER) valuation from 15 times previously to 13 times in tandem with the lower forward PER of other local EMS players that average at approximately 13 times. This is also closer to PIE Industrial’s 10-year average PER of 12.5 times. 

Hence, our TP of RM1.27 is derived from 13 times PER estimated FY19 earnings per share of 9.79 sen. We think that valuation is appealing now after the stock fell to a three-year low. At current price, it is also trading at about -1 standard deviation below its five-year average. 

Meanwhile, we believe that earnings recovery is underway. Topping that, the company continues to be in a net cash position of RM93.6 million and dividend yield is expected at 4.3%. — MIDF Research, Aug 19