Valuation / Recommendation

Results were below expectations, achieving 45.8% and 34.5% of our full year revenue and profit forecasts for FY22 respectively due to higher labour cost and provision for slow moving inventories.

We revise our revenue and profit forecasts downward by 8.3% - 15.9% and 19.1% - 30.6% for FY22F – FY24F due to higher labour cost and provisions, and lower volume from customer N. We maintain a BUY recommendation on PIE with a revised TP of RM4.07 based on FY23F EPS 18.6 sen and PE of 21.9x in line with the 2-years average. We like the stock for its attractive dividend yield, 3-year CAGR forward earnings of 13.2% from FY21 to FY24F. The target price represents a potential return of 24.1% over the current price.

Investment Highlights

Revenue for the quarter was stronger year-on-year (yoy, up by 25.9%) due to higher demand from new and existing customers. Profit was weaker yoy (down by 38.8%) due to higher labour cost and provision for slow moving inventories.

Proven track record and strong support from Foxconn. PIE was able to maintain profitable since inception, achieving a 10-year revenue CAGR of 11.4% from FY12 to FY21. Operations were unaffected during the Covid-19 pandemic as the company was classified under essential services. With the strong support from Foxconn Technology Group, which is PIE’s indirect major shareholder, the company can benefit from its network to improve its profit margins by leveraging on the raw materials.

More new customers on board. We noticed that with Customer N secured in FY20, which is involved in the video games business, a full-year revenue contribution from this customer was realised in FY21, allowing the company to achieve a record-breaking revenue above RM1bn. The company plans to dedicate a floor space of 120,000 sq ft to a new customer namely Customer A, involved in the supercomputing cloud business secured in FY21. With a full-year revenue contribution from Customer A expected in FY22, we opine that this could potentially catalyse PIE’s earnings moving forward, driven by higher margins as raw materials are consigned by the customer.

Arrival of more workers. In tandem with the expansion plans, the company plans to hire more workers, expected to arrive in 3Q22. The additional workers are expected to replace some inefficient existing workers and produce higher productivity and output. Running at double shifts on 24 hours a day, we expect a RM150m worth of backlog orders to be cleared by end of FY22.

Risk factor. Key risks include fluctuation of raw material prices and labour shortages.

Source: Mercury Securities Research - 12 Aug 2022