PIE - BUY - 26 May 2008

P.I.E. Industrial - 1Q08 net profit above expectations (Results Note)



Price: RM5.80

Target Price: RM7.15

Recommendation: BUY



· 1Q08 net profit of RM7.63m was above expectations at 17% of our FY08 net profit of RM41.6m. Typically 1Q net profit is 15% of full year's profit being the slowest quarter. The better than expected results is largely due to sharply improved gross margin of 21% as contract manufacturing services (CMS) division contribution to turnover is 98% as trading activities winds down as PIE concentrates on CMS.

· YOY, 1Q08 net profit was 60% higher. Contribution from low margin trading division was lower at 2% compared to 5% in 1Q07. In addition, stronger revenue of 33.7% arose from higher orders from its key clients and also from its expanded wire and cable harness division. Gross margin was significantly higher at 21% compared to 16% in 1Q07.

· QoQ, 1Q08 net profit fell 46.2% as income tax rate was higher at 25.6% while higher administration and distribution expenses arose from the new plant including depreciation.

· YOY, 4Q07 net profit was 34% higher on the back of higher operating margins with lower trading revenue. Expense were lower as PIE made extra provision for bonus in 4Q06 where, in 4Q07 they have already reversed the extra the made earlier in 1H07. operating income was also lower by 34.9%. Typically, the realisation of investment income arose in 4Q.

· Maintaining FY08E and FY09E net profit of RM41.6m and RM47.3m respectively. We believe our forecast is reflective of the current conditions of rising cost especially with commodities.

· Maintain BUY with target price of RM7.15 based on regional CMS players' average FY08E PER of 11x on EPS of 65 sen. We remains very positive on PIE's future prospects under the current rising cost environment as customers will turn to more efficient CMS companies as they can provide the lowest cost alternative without compromise on quality and timing. As demonstrated by PIE, they continue to secure more contracts while being able to maintain their profit margins. Their track record has also enabled them to pass on the cost of rising raw materials to their clients.





KENANGA INVESTMENT BANK BERHAD (15678-H)