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Monday, August 20, 2018

P.I.E Industrial - Within Expectations

Author: kiasutrader | Publish date: Mon, 20 Aug 2018, 11:50 AM

Though 2Q18 was still dragged by industry-wide components shortages, CNP soared c.7x to RM7.0m. We deemed the results within due to stronger 2H18 prospect, which will see higher ramp-up from new/existing customers. New contracts in 2H18 with higher design flexibility and complexity should fend off the systemic impact, with full fruition to be seen in FY19. No changes to our FY18E/FY19E earnings. Maintain OP with an unchanged TP of RM2.00.

Within expectations. Though 2Q18 was still dragged by components shortages as noted in our report dated on 12th July 2018, its CNP saw a sharp improvement of nearly 7x to RM7.0m QoQ (or -38% YoY), sending 1H18 CNP to RM8.0m (-50%) which made up 18%/17% of our/consensus full-year estimates. We deemed the results to be within expectations as typically, the financial 3Q and 4Q will see much better earnings on higher seasonal ramp-up alongside contribution of new products starting from 3Q18. Note that over the past three years, 1H CNP made up only 33-52% of full-year numbers; with 4Q results alone contributing 50-65% over the past two years. We expect similar trend for this year. Meanwhile, absence of dividend was expected in this quarter as the group typically declares dividends after its 4Q results.

YoY, 1H18 revenue decreased by 15%, dragged mainly by its manufacturing segment (-16%). We gather that while not much order revisions were made by key MNC clients, production and delivery were delayed due to the components shortages issues. With low operational efficiency alongside weaker USD, EBIT margin was compressed by 2.3ppt to 6.5%, resulting in a much weaker CNP of RM8.0m (-50%). QoQ, while revenue remained flat at RM141.6m (-3%). Core NP surged by 7x to RM7.0m which we believe was underpinned by better product mix and stronger USD/MYR, augmented by lower ETR of 20% (vs 25.9%).

Stronger 2H18 to make up for the shortfall. While 1H18 remained soft (due to exceptionally weak 1Q18 results) as highlighted in our report published on 12th July 2018, seasonal ramp-up alongside higher allocation from its Telecommunication, Bar-code scanners and raw cable customers should help the group to achieve a mid-to-high single-digit top-line growth for FY18. To fend off the ongoing systemic impact (components shortages), the group is also looking at new contracts by putting higher capex allocation of RM12m in FY18 (vs. previously guided RM5m, for more SMT lines). As the new contracts, i.e. industrial printing and production as well as medical segment, involve more complicated manufacturing processes with sizeable volume, we believe that 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 estimated 2-year revenue/CNP CAGR of 11%/14% with the expectation of the subsiding component shortage issue.

Maintain OUTPERFORM with an unchanged TP of RM2.00 (14.0x FY19E PER). We still see good value proposition at current price level, with its Forward PER at only 11.5x, at a 16% discount to its closest EMS peers which is trading at 13.5x PER. Note that this is all against the backdrop of its relatively higher NP margin, more advanced manufacturing capabilities as well as having strong parentage support from Foxconn Technology Group, which we think is unjustified. Maintain OUTPERFORM.

Source: Kenanga Research - 20 Aug 2018

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