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Tuesday, February 28, 2017

P.I.E Industrial - Over the Hump

Author: kiasutrader | Publish date: Tue, 28 Feb 2017, 10:24 AM

FY16 CNP came in way above expectation. Positive surprises came from: (i) faster-than-expected learning curve on new products (which led to lower wastage and higher yields), (ii) stronger-than-expected revenue (from new projects), alongside improving labour issues and favourable forex translation. Absence of DPS in this quarter was expected. Post earnings revision, our TP is raised to RM2.60 (15.0x FY17E PER; from RM2.40). The latest turnaround success story once again showcased its strength as an EMS provider that is always upping the ante. Maintain OUTPERFORM.

Above expectation. A strong 4Q16 CNP of RM24.9m was reported (+414% QoQ; -12% YoY), sending FY16 CNP to RM38.9m (-37%) which made up 143% of our full-year estimate. Note that FY17 CNP has been adjusted for: (i) net reversal of impairment on receivables (RM1.2m), and (ii) inventory write-downs (-RM3.7m) as well as other immaterial items amounting to <RM1m. The positive deviations were due to: (i) lower wastage and shorter-than-expected gestation period from new product ramping, (ii) higher-than-expected operational efficiency (alongside more products output to counter fixed overhead costs) and possibly (iii) better- than-expected product mixes. Favourable forex translation also augmented the operationally strong numbers. Meanwhile, absence of DPS was expected in this quarter. Note that the group typically declared dividends after 4Q results; which we believe the pay-out for FY16 will be maintained at least at 40% and above.

YoY, revenue declined by 13%, dragged down by lion’s share manufacturing segment (-13%). Based on our understanding from management on this segment, the weaker sales were caused by the absence of the box build business from STB and lower orders from Barcode scanner customers. However, Telco customers helped to cushion the impact partly with new and existing orders grabbed from other competitors. At the operating level, however, due to the high overhead costs (operational deleveraging compared to last year) as well as unfavourable product mix, EBIT dipped by 42%. QoQ, the much stronger 4Q16 revenue (+49%) was driven by: (i) stronger seasonality, (ii) higher orders from Telco and new customer, further augmented by (iii) stronger forex translation (+7% to RM4.32/USD). While topline shown a solid performance, core NP spearheaded further by 596% on the back of: (i) improving labour issues, (ii) better yields on lower wastage, (iii) net impact of stronger currency as well as (iv) lower ETR.

Once again showcased its strength as an integrated ‘one-stop’ EMS provider that is always upping the ante. While 9M16 appears to be a muted one for the group given a series of unfortunate events, the group has managed to turn around swiftly with a remarkably strong 4Q16 quarter being recorded. Note that the group’s efforts in nurturing growth with existing major and cultivating new customers are the major success catalysts that turned the tide. We believe that should the new projects (previously mentioned) are awarded accordingly by existing and new customers, the group could achieve new high on its revenue. Notably, even with our current conservative new sales assumption, which is half of the value from the potential projects (that will commence in FY2017 on gradual basis), it is already more than offsetting the sales contribution from STB customers (which was the major driver in 2015). No major capex will be incurred as the existing facilities are sufficient to take up the orders.

Maintain OUTPERFORM with a higher TP of RM2.60 from RM2.40 (based on a targeted PER of 15.0x). Post-result, our FY17E NP has been increased by 8% to mainly account for the stronger USD assumption of RM4.40/USD as well as full-year model adjustment. The group’s superior margins, advanced manufacturing capabilities as well as strong parentage support from Foxconn Technology Group remained as key investment merits. Risk to our call; (i) slower-than-expected sales, (ii) loss of orders from its key customers, and (iii) adverse currency translations.

Source: Kenanga Research - 28 Feb 2017

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