PIE Industrial Bhd
(June 16, RM2.36)
Initiate neutral call with a target price of RM2.49: PIE Industrial Bhd (PIE) is a vertically integrated electronics manufacturing services (EMS) provider with a wide range of capabilities to serve customers from various industrial sub-sectors. It is a 51.4% subsidiary of Taiwan-listed Pan International Corporation Ltd, which is, in turn, a part of the Foxconn Technology Group.

PIE was set up in 1989 and started off with raw wire and cable manufacturing, cable assembly and wire harness. Over time, it expanded its capabilities to become a one-stop EMS provider with four operating plants in Penang and one in Thailand.

As part of the world’s largest and most renowned EMS giant, Foxconn, PIE is able to benefit from the economies of scale enjoyed by its parents as well as technological transference. As a result, PIE is able to price much more competitively with up-to-date technological capabilities.

PIE is in a net cash position of RM103.9 million and has been paying out more than 30% of its profits historically with recent payout ratios averaging at 50%. The net cash also makes up 11.5% of its market capitalisation.

About 80% of PIE’s sales are denominated in the US dollar. Previously, PIE had benefited from the stronger US dollar but the trend may be reversing. The absence of foreign exchange and currency conversion gains could also offset the higher volume of products sold.

We value PIE at 15 times price-earnings ratio (PER) based on the financial year 2018 earnings per share of 16.62 sen. The forward PER is in line with the average of VS Industry Bhd’s and SKP Resources Bhd’s 14.75 times due its strong management capabilities and healthy balance sheet. However, we are neutral on the stock due to the strong ringgit which will dampen the average selling prices. Rerating catalysts for the stock will be higher-than-expected orders and better-than-expected margins. — MIDF Research, June 16