PIE's 4QFY24 is expected to show sequential and YoY improvements, supported by normalised forex rates and higher contributions from high-margin Customer A. For FY25, the group remains optimistic, with expanded production from Customer A and contributions from a new switch and server client, targeting RM1b in revenue at 50% utilisation of Plant 6. PIE continues to streamline operations by prioritising high-margin clients and anticipates new orders from automotive, robotics, medical, and telecom sectors post-U.S. election. Despite rising labour costs, PIE is negotiating with clients to pass-through these increases. We maintain our FY24 forecast, raised our FY25 net profit estimate by 8%, and increased our target price to RM6.85, reiterating our OUTPERFORM rating.

We came away from PIE's results briefing remaining positive on its prospects. The key takeaways are as follows:

1. 3QFY24 results insights. PIE reported that the group's 3QFY24 performance was affected by a slower contribution from Customer A, due to earlier technical issues that have now been resolved, which led to re-work in assembly processes during the quarter. Forex losses of RM11.7m also affected results, though approximately 70% of these losses were unrealised. The company expects the unrealised losses to be reversed in 4Q if the MYR/USD exchange rate remains stable at around RM4.40/USD.
2. Better 4QFY24 and stronger FY25 outlook. The group expects improved performance in 4QFY24, both sequentially and YoY, driven by a stabilising exchange rate and increased contributions from higher-margin Customer A. Looking into FY25, PIE remains optimistic, supported by rising contributions from Customer A amid a favourable industry outlook and expanded dedicated floor space. Additionally, the group's newly secured client (Customer H) for switcher and server products is expected to commence contributions, occupying the entire Plant 6 (c. 280k sq ft). With 30 different switch modules completed and an RM60m order secured for FY25, PIE aims for Plant 6 to contribute around RM1b in revenue in FY25, based on an estimated 50% plant utilisation rate. PIE also targets that 2/3 of this client's orders will be on a consignment basis, with the remainder as turnkey projects.
3. Operational optimisation and growth prospects. The group continues to streamline its operations by reducing orders from lower-margin customer and reallocating capacity and resources to higher-margin clients. Following the US presidential election, PIE expects to resume active discussions with potential new customers in the automotive, robotics, medical, and telecommunications sectors and is optimistic about securing new orders in these areas. We have not yet factored these potential orders into our model. PIE's strong track record positions it as a highly sought-after EMS provider, particularly as Chinese companies accelerate their China+1 strategy to mitigate potential US tariffs on Chinese imports.
4. Headwinds from rising labour costs. The group faces challenges from increased minimum wages and mandatory EPF contributions for non-citizen employees, which are expected to raise staff costs from 10% to 13% of total operating costs. To mitigate this impact, the group is actively negotiating with clients to pass through the increases.

Forecasts. We are maintaining our FY24 net profit estimate but increasing our FY25 net profit by 8% to RM112m, reflecting an updated, higher margin assumption for Customer A to align with recent trends.

Valuations. Correspondingly, we raised our TP to RM6.85 (from RM6.35 previously) based on FY25F EPS pegged to an unchanged PER of 23.5x, at a 10% discount to AI server-related peer such as NATGATE (OP; TP: RM2.30). 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 and (iii) unfavourable currency movements.

Source: Kenanga Research - 12 Nov 2024