PIE is bracing for a seasonally stronger 4QFY23, underpinned by robust demand from Customer M (military communication device), Customer A (production ramp-up of the last batches of its existing model) and Customer N (ahead of the launch of its new model in 2024). We maintain our forecasts, TP of RM3.80 and OUTPERFORM call.

We came away from an engagement with PIE yesterday feeling reassured of its positive outlook. The key takeaways are as follows:

1. PIE saw order forecasts turning positive towards the end of 3QFY23, signalling a seasonally stronger 4QFY23 ahead. The stronger orders were mainly contributed by Customer M (manufacturing of national security communication devices) given the heightened geopolitical tensions in the Middle East. Meanwhile, Customer A asked for PIE to raise the production of its existing model (of which parts were already sitting in PIE’s warehouse) before moving on to a new model. There will be continuity in terms of orders from Customer A as upon the full delivery of the existing model, PIE may move on to produce the new model and typically a new model enjoys 12 months of brisk sales.

2. PIE has received confirmation from Customer N to work on a new model of its device that is slated for launch in 2024. While the group is considering taking on the final assembly portion for the new model, it indicated that solely handling the increased orders for PCB assembly will already overwhelm the group. That said, Customer N is determined to groom PIE to be one of its reliable second sources and will continue to gradually increase allocation to PIE from a current level of 10% of its global volume.

3. The group has successfully added four new customers with products related to: (i) drone device for light shows, (ii) diagnostic device for oral cancer, (iii) smart home, and (iv) industrial sensors. Negotiations with all four customers have been finalised and qualification and sampling phases are already underway. Upon commencing mass production, contributions from new customers are expected to collectively account for c.8%−12% of total group revenue in FY24.

4. Beyond the above, there are more potential new customers in discussion. The renovation of Plant 5 (c.100k sq ft) has been completed and is in the final stages of on-boarding a new customer while Plant 6 (c.280k sq ft) is still under construction and will likely be taken up by a single customer’s new project by mid-2024.

Forecast. Maintained.

We maintain our TP of RM3.80 based on unchanged 18x FY24F EPS, in line with its peers’ forward average. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We continue to like PIE for: (i) its comprehensive skillset, making it a topchoice EMS provider for MNCs, (ii) various competitive advantages it enjoys as a unit of Foxconn, and (iii) its diversified and evolving client base, from those involved in communication devices and power tools to the latest DeFi equipment. Maintain OUTPERFORM.

Risks to our call include: (i) loss of orders from/non-renewal of contracts by its key customer, (ii) labour shortage and rising labour cost, (iii) negative reviews on treatment of migrant workers by activists, and (iv) unfavourable currency movements.

Source: Kenanga Research - 21 Nov 2023