KUALA LUMPUR (Nov 21): Phillip Capital has initiated coverage on Cape EMS Berhad (Cape) with a "buy" rating at RM1.09 and a target price (TP) of RM1.90 on the back of its positive earnings outlook, which is seen to benefit from the escalating US-China trade war.

In a note on Tuesday, the research house said the company has done well in growing its net profit at a three-year compounded annual growth rate (CAGR) of 106% from 2019 since CEO Christina Tee and her partners took over and restructured the company back in 2013.

“The success can be attributed to the escalating US-China tension war, which began in 2019, leading MNCs to diversify their manufacturing operations to Malaysia,” it said.

Phillip Capital is also optimistic about Cape’s earnings growth in the years ahead due to rising 5G adoption, increasing demand for optical modules, rapid electric vehicles (EV) penetration infrastructure expansion and the shift in smokers’ preference towards e-cigarettes.

Given the surge in global demand for EVs, it is anticipated that the EV sector will be the fastest-growing area in Cape.

Its EV contribution, only 1% in 2022, is expected to increase significantly to approximately 32% of overall group revenue by 2024.

In light of these factors, Phillip Capital forecasted a CAGR of 51% in net profit over a three-year period from 2022 to 2025.

This optimistic expectation is supported by increased demand resulting from trade-diversion play, significant expansion of current production floorspace and margin expansion from a favourable revenue mix, higher-value products and better production automation efficiency.

“We like Cape for its strong earnings growth profile, entrepreneurial management team, and diversified portfolio mix leveraging key secular growth trends.

“Downside risk includes weaker customer demand,” it added.

At the time of writing, Cape was traded up three sen or 2.75% to RM 1.12, giving it a market capitalisation of RM1.03 billion.