PIE is poised for a stronger 2QFY24 as IC supply shortage from Customer A would have eased, while its production output ramps up using additional floor space from Plant 5. Meanwhile, its new server customer is on track for pilot production in 4QFY24. It is also engaging a potential customer that could result in contracts with attractive margins. We maintain our forecasts, TP of RM6.75 and OUTPERFORM call.

We came away from a recent engagement with PIE feeling reassured of its growth prospects. The key takeaways are as follows:

1. Plant 5 (c.100k sq ft), fully dedicated to Customer A, has been in operations since June 2024, right on schedule. Concurrently, PIE has planned for further floor space extension at the rear portion of Plant 5, increasing its size by approximately 70% to around c.170k sq ft to meet future demand. Combined with the existing space allocated to Customer A in Plant 3 (c.80k sq ft and fully utilised), this represents a threefold increase in floor space to about 250k sq ft. The additional space in Plant 5 is timely, as the IC supply constraint of Customer A (operating on a consignment basis) has lessened compared to 1QFY24, when production was limited to a third of the required orders; hence, production level in 2QFY24 was higher.

2. PIE indicated that the status of its recently secured client (related to server and switches for data centre) is progressing smoothly. It is well 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 Plant 6 (c. 280k sq ft), its latest and largest facility. Upon a full ramp-up, Plant 6 will produce approximately one-third of the new customer’s global volume. This positions PIE as an excellent proxy for the data centre fit-out phase, which typically follows the 12- month construction phase.

3. PIE is showing no sign of slowing down. It is in discussion with a potential new customer from China that is considering picking PIE as its sole contract manufacturer. We understand that a deal is premised upon PIE being able to improve its overall margins alongside boosting its revenue growth. We believe PIE’s value proposition comes from its strong track record, making it a highly sought-after EMS vendor, more so amidst Chinese businesses stepping up their China+1 initiative to pre-empt potential punitive US tariffs on Chinese imports.

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: RM2.06). 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 - 6 Aug 2024