Undeterred, PIE sees better results ahead

PIE Industrial Bhd, which reported a slight dip in profits in its latest quarter, could be seeing improving numbers going forward.

The electronic manufacturing services (EMS) company’s net profit for the second quarter ended June 30, 2022 (2Q22) declined by 36.5% to Rm8mil from Rm12.59mil in the same period last year.

This was attributed to higher labour costs and slow-moving inventories.

On the other hand, the group’s revenue for 2Q22 grew by 25.9% to Rm296.3mil from Rm235.4mil in 2Q21, driven by increased sales from existing and new customers for EMS, for raw wire and cable products, as well as wire harness products.

Group managing director Alvin Mui Chung Meng tells Starbizweek the labour issue that

impacted the profit margins of PIE in its latest quarter is being dealt with by a combination of automating some processes in its production lines that are more labour intensive as well as by shifting some orders to its unit in Thailand.

“To ensure continuous growth in earnings, automation of manufacturing processes is an absolute necessity. This will ensure better output in terms of consistency and quality of products, which will be translated into improved margins.

“Also, plans are underway for the group to move more orders to its facility in Thailand, where labour is more readily available.

“This will allow us to provide our customers with dual manufacturing sites for their products as an added contingency,” he says.

Kenanga Research notes that PIE’S higher labour expenses was not only due to the implementation of the new wage policy in May 2022, but was further compounded by having to pay overtime wages for less efficient workers.

“The group attributed one of the factors of margin compressions to the double to tripling of overtime salary paid to compensate for less efficient local workers amidst ongoing staff pinching among Penang companies,” Kenanga says.

However, the research house adds that PIE’S labour issues appear to be shortlived as the group has begun to receive new foreign workers in batches. The recruitment process is targeted to be completed by the end of this month.

Inventory issue

Another issue that has impacted the net profit of PIE this quarter is its high inventory level, for which it had to make provisions.

On this issue, Kenanga Research says the group maintained that there is nothing to be concerned about.

“PIE said about 90% of it would be reversed in the second half of this year (2H22), with the majority of it in 4Q22 when it ramps up production for its seasonally stronger quarter. The group does not expect to see further provision in 2H22,” says the research house.

PIE’S Mui remains optimistic about the quarter’s ahead.

He says the ongoing Us-china trade war along with the rise of electric vehicles (EVS) has enabled the group to leverage on the growing global demand in the EMS industry.

He says the United States-china trade war is benefiting manufacturers in the AsiaPacific.

“Many customers are looking to manufacture their products in countries other than China, not only to avoid being impacted by the trade war but also to avoid calamities like floods, lockdowns due to the pandemic and power supply shortages.

“Overall, it is difficult to imagine any products in this day and age that do not require electronic parts to function. The demand for electronic products has flooded the order books of many electronic manufacturing companies.

“Such a strong demand is expected to continue for the long term, fuelled by the rise of EVS,” Mui says.

He adds that PIE should hit a revenue of Rm1.3bil this year. The group’s revenue in FY21 was Rm1.02bil.

“The main driver for growth in 2022 would be earnings generated from our new customer, which is involved in super computing server products. Apart from the new customers that we have acquired in these two years, PIE has not ceased to engage with other potential customers in the robotics and mobile energy industry to propel our next phase of growth,” Mui notes.

PIE has eight plants and three facilities in Penang. It recently acquired another plant in Penang, which will be ready in the fourth quarter of this year.

On inflationary pressures, Mui notes that its diversified product portfolio helps. So does having Foxconn Technology as an indirect shareholder.

PIE is able to benefit from the Taiwanese giant’s huge purchasing power, Mui explains.

“The electronic segments that PIE is involved in are industrial, telecommunication, consumer, medical, automotive, servers

and power tools. With such a diverse and balanced portfolio, the group is better shielded from any inflationary impact,” says Mui.

As a 51.42%-owned subsidiary of Taiwanlisted Pan-international Industrial Corp, in which Hon Hai Precision Industry Co Ltd (formally known as Foxconn) has a 27.33% stake, PIE is privy to the perks that come with having Foxconn as its indirect substantial shareholder.

“Not only does PIE share and enjoy Foxconn’s huge purchasing power in terms of raw materials and manufacturing equipment, we also received a project on digital entertainment devices from Foxconn in 2020. This project had contributed about 42% of our revenue in 2021. In terms of EV, Foxconn has teamed up with PTT Public Co Ltd in Thailand to produce EVS.

“The setting up of an EV plant as a result of this collaboration is in progress and PIE may become the supplier for the project’s wire harness products when it materialises,” says Mui.

MIDF Research attributed a higher effective tax rate at 36.1% in 2Q22 (compared with 22.4% in 2Q21) as one of the factors for the group’s lowered profits for the quarter.

It projects that PIE’S earnings would be driven by its factory expansion plans.

“The group’s factory capacity expansion plan is fuelled by strong demand from its existing and newly acquired major customers, as it is almost fully utilising its existing capacity.

“We are looking at roughly an additional 25% in capacity in the coming quarters,”says MIDF Research.

Meanwhile, Kenanga Research is of the view that higher labour costs may persist for PIE and that there may be delay in the upward revision of average selling prices for products to the group’s customers.