Currently, PIE is producing at 60% of Customer A’s orders (vs. 30%- 40% in 1QFY24) as integrated circuit (IC) shortages ease. The number should rise further in the coming months. We understand that there is strong demand for Customer A’s products. Its Plant 5 will come in handy next month as it will double the total floor space dedicated to Customer A. We maintain our forecasts, TP of RM6.75 and OUTPERFORM call.

We came away from PIE’s post-1QFY24 results briefing reassured of its growth prospects. The key takeaways are as follows:

1. PIE attributed the softer performance in the recently reported 1QFY24 to weaker loading volumes for Customer A (currently occupying the entire Plant 3 of c.80k sq ft). This is due to insufficient supply of IC from Customer A (operating on a consignment basis), which curbed production to 30%-40% of the required orders. However, the supply issue has eased and PIE is now able to increase production to 60%, with further pick-up anticipated in the subsequent months ahead. Additionally, the group will commence operation in Plant 5 (c.100k sq ft), fully dedicated for Customer A, in June 2024 onwards, doubling the total floor space for this single customer. Concurrently, extension works will take place at the rear portion of Plant 5, further increasing its size by c.70% to accommodate future demand.

2. The group is currently in the midst of finalising discussions with a potential new customer from China that is looking to appoint PIE as the sole contract manufacturer. While details are scanty at this juncture, we learnt that this new customer could potentially fill in any void should there be reduction in orders from Customer N (its lowest margin customer) with equivalent revenue size and even better margins.

3. PIE reiterated that its recently secured client (related to server and switches) is on track to begin pilot production by 4QFY24 which will be followed by mass production in 2025. This sizable client will take up the entire new Plant 6 (c. 280k sq ft), its largest facility. Upon full ramp-up, Plant 6 will produce approximately one-third of the new customer’s global volume.

Forecasts. Maintained.

Valuations. We keep our TP of RM6.75 based on FY25F EPS pegged to an unchanged PER of 23.5x, in-line with AI-related peer such as NATGATE (OP; TP: RM1.58). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to like PIE for: (i) its comprehensive skill set, making it a top-choice 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 May 2024