PIE FY19 likely to rebound from challenging FY18

TheEdge Thu, Nov 08, 2018 10:22am - 5 years View Original


PIE Industrial Bhd
(Nov 7, RM1.56)
Maintain buy with a lower target price (TP) of RM1.86:
PIE Industrial Bhd’s core net profit (CNP) of RM22.5 million for the first nine months of financial year 2018 (9MFY18) missed our expectations, making up 47% of our and 49% of consensus full-year estimates. This negative deviation is mainly due to the prolonged shortage in component supply.

The CNP for 9MFY18 declined 24% year-on-year (y-o-y) to RM22.5 million as revenue dipped by 7% to RM461.3 million. The drop in CNP for the period is mainly due to the slower-than-expected delivery in orders which led to production inefficiency and subsequently lower profitability. Electronics manufacturing services (EMS) sales were lower by 11% to RM339.1 million, while the raw wire and cables segment improved by 3% to RM93 million.

Third quarter (3QFY18) net profit jumped 57.7% y-o-y to RM14.1 million as revenue increased by 10.4% y-o-y to RM174.4 million. Notwithstanding a challenging first half (1HFY18), we believe that 3QFY18 is a turning point in the prolonged component shortage issue which has plagued the company since 1HFY17.

The surge in quarterly CNP is attributed to the higher sales, better product mix and reversal of impairment of trade receivables. The improvement in sales is due to the higher demand for EMS from existing customers (+12.4% y-o-y to RM133.5 million) and wire harness products.

Sequentially, CNP soared 92.9% as revenue improved by 23.2%. The significantly higher CNP compared with 2QFY18 was mainly due to the improvement in operational efficiency that stemmed from higher deliveries to customers. During the quarter, customers had sourced for raw materials in the open market, which eased the problem of input components in the manufacturing process. As a result, the company was able to ramp up its production.

We have trimmed our FY18 forecast (FY18F) and FY19F CNP estimates by -20.7% to RM38.2 million and -10.7% to RM47.7 million respectively. We also cut our FY18F and FY19F revenue assumption by -8.8% and -7.9% to RM 636.4 million and RM 719.2 million respectively as we revised our order replenishment rate and profit margin.

PIE Industrial in FY19 is to rebound from a challenging FY18. We expect higher orders in FY19 from new and existing customers. Some orders not met in FY18 may also be carried forward into FY19. In addition, we also anticipate a recovery in the company’s profit margin as the component problems ease. This allows the company to better plan and further improve its production efficiency.

Furthermore, we expect better product mix to contribute to an improving margin next year, albeit this contribution might be partially offset by operating costs that are inclusive of labour costs.

We estimate that the impact of the higher minimum wage on operating profit is limited to about 1%.

We maintain our “buy” call with an adjusted TP of RM 1.86 as we roll over the base year to FY19 pegged at an unchanged valuation method of 15 times price-earnings ratio (PER), based on its five-year average.

We believe that the worst impact of the component shortage is over for the company, as its customers widen their sources of supply.

Looking forward, we are more upbeat about its FY19 outlook that is underpinned by higher leads from existing and new customers.

The TP of RM1.86 is derived from the FY19F earnings per share of 12.4 sen. The current share price implies forward PER of 12.7 times, which is lower than its five-year PER of 15 times. The company is in a net cash position of RM82.8 million and its dividend yield is expected to be at 3.8%. — MIDF Research, Nov 7

The content is a snapshot from Publisher. Refer to the original content for accurate info. Contact us for any changes.






Related Stocks

PIE 3.560

Comments

Login to comment.