PIE Industrial Bhd
(Nov 18, RM1.52)
Maintain market perform with an unchanged target price (TP) of RM1.40: PIE Industrial Bhd’s third quarter of financial year 2019 (3QFY19) registered a core net profit (CNP) of RM16.8 million (+109% quarter-on-quarter [q-o-q]; +18% year-on-year [y-o-y]), bringing its cumulative nine months of FY19 (9MFY19) CNP to RM25.4 million (+14% y-o-y), accounting for 65%/68% of our/consensus estimates. We deem this to be in line as 4Q usually sees better results on the back of a higher seasonal production ramp-up for an existing customer. Its 3QFY19 revenue dipped 7.8% q-o-q due to lower order volume. However, the company made up for lost ground by improving production efficiency for low-end telecommunications devices (which caused an 89% y-o-y nosedive in 1QFY19 net profit). No dividend was declared for the quarter as the group typically declares a dividend after announcing its 4Q results.

 
Y-o-y, 9MFY19 revenue climbed 8%, while CNP grew 14% to RM25.4 million due to a lower effective tax rate of 22% (-9.5 percentage points [ppts]). Q-o-q, 3QFY19 CNP doubled (+109%) to RM16.8 million, owing to a favourable US dollar-to-ringgit exchange rate (4.20 versus 4.10) and better use of raw materials after streamlining its production process. As a result, its earnings before interest and tax margin improved to 13.5% (+8.9ppts).

Moving forward, we expect to see a continuation of earnings recovery in the upcoming quarter, premised on: i) a seasonal ramp-up from its telecommunications and tooling customer; ii) steady growth from its existing key customers; and iii) an improvement in efficiency as the company is planning to phase out its low-end communications devices in the next quarter. PIE Industrial is still receiving enquiries from companies that are looking to shift their supply chain out of China, including one potential customer in preliminary discussions. We believe that this potential customer could contribute sales of more than RM30 million, assuming a full ramp-up. If discussions are successful, meaningful contributions will likely kick in in 2QFY20.

We maintain our FY19 CNP estimate of RM39.2 million. The jump in 3QFY19 earnings was well within our expectations and we have accounted for the continuation of earnings recovery into 4Q.

We maintain our “market perform” call with an unchanged TP of RM1.40 based on an unchanged 12 times estimated FY20 price-earnings ratio. With the recent run-up in its share price, we believe the market has priced in expectations for a recovery in the subsequent quarters.

Risks to our call include: i) lower/higher-than-expected sales; ii) a loss of orders from its key customers; and iii) adverse/favourable currency translations. — Kenanga Research, Nov 18