PIE - BUY - 11 Aug 2008

P.I.E Industrial - 1H08 net profit within expectations (Results Note)



Price: RM4.86

Target Price: RM7.15

Recommendation: BUY



1H08 net profit of RM15.7m was within expectations at 38% of our FY08 net profit of RM41.6m. 1H07 net profit was 33% of FY08 net profit of RM35.6m. 1H performance is typically lower than 2H as the peaking of orders typically coincide with year end as capex budgets are fulfilled.

YOY, 1H08 net profit was 32% higher. Lower trading activities contributing only 2% of revenue compared with 3.9% in 1H07, resulted in higher gross margin of 19% v 17% in 1H07. In addition, higher foreign exchange gain as reflected in 53% increase in other operating income also bolstered net profit.

QoQ, 2Q08 net profit grew 5.4% despite revenue falling 11.3% as it was compensated by RM1.6m higher foreign exchange gain and RM3.1m lower administration and distribution expenses (less provision for doubtful debts). Lower orders from clients on the wire and cable harness division and EMS is seasonally lower.

Similarly 2Q08 net profit was 13% higher YOY on the back of foreign exchange gain.

* Maintaining FY08E and FY09E net profit of RM41.6m and RM47.3m respectively. We believe our forecast is reflective of the current conditions. Its new plant, purchased and refurbished at a low cost of RM20m should reduce overall production cost given that PIE can revert to operating on one shift.

* 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 as they continue to be able to maintain profit margin despite rising cost environment as more orders are being secured from existing and new clients who are more reluctant to place orders with smaller EMS companies given higher risk of non deliveries given more difficult operating environment. PIE continues to benefit from utilising Hon Hai group R&D only when it needs it and also lower materials and component cost from group acquisition.