PIE’s recipe for new customer growth

AT the start of 2024, PIE Industrial Bhd was riding a wave of optimism, with analysts touting the group as one of the prime beneficiaries of the global artificial intelligence (AI) and data centre (DC) boom.

However, sentiment toward the electronics manufacturing services (EMS) provider turned cautious following the US government’s efforts to limit AI technology exports.

This shift in outlook is due to PIE’s exposure to the AI server and switch assembly business.

The company is still in the early stages of assembling AI servers for clients.

PIE positions itself as a one-stop EMS provider for industries such as computing, medical devices and automotive.

For the financial year 2024 (FY24), the group recorded a 20% year-on-year (y-o-y) decline in revenue, mainly due to lower product orders in its EMS segment.

Despite the softer revenue, PIE registered a 9% y-o-y growth in core net profit to RM59mil in FY24, although this fell short of analysts’ expectations and consensus estimates.

Things do seem to be looking up now.

For the first quarter of 2025 (1Q25), PIE reported a significant 55% increase in net profit to RM15mil.

This was underpinned by higher demand in the EMS and raw wire and cable divisions, as well as lower provisions for slow-moving inventories.

Despite the increase in PIE’s 1Q25 earnings, the group’s outlook remains clouded by ongoing challenges.

For one, Kenanga Research has adopted a more conservative outlook following a “less-than-upbeat” results briefing.

The group’s margins are expected to come under pressure as PIE transitions from a consignment to a semi-consignment model for its key customer, dubbed as Customer A, involving supercomputer-related products.

Under the consignment model, the customer manages material procurement, while PIE is responsible for assembly and manufacturing.

With the shift, PIE will now be responsible for procuring selected input materials, which is expected to compress profit margins – even as revenue from Customer A continues to grow moving forward, according to Kenanga Research.

In 1Q25, revenue contribution from Customer A accounted for 37% of the group’s total turnover, amounting to RM102mil.

In addition, uncertainty over US tariff policies has stalled PIE’s server-related discussions with another key client, known as Customer H.

The research house notes that “management has tempered expectations of securing the contract”.

These factors led Kenanga Research to downgrade its call on PIE from “outperform” to “market perform”, while lowering its target price (TP) from RM5.52 to RM4.60.

The revision is based on a rolled-forward FY26 valuation and an unchanged price-to-earnings (PE) ratio of 21.6 times.

The research house also slashed its FY25 and FY26 net profit forecasts by 31% and 26%, respectively, to reflect lower net margin assumptions.

Meanwhile, Affin Hwang Investment Bank Research has terminated its coverage of PIE, citing “reallocation of resources” and the stock’s “low trading liquidity”.

Its final rating on the counter was a “hold” with a TP of RM3.88, pegged to a target PE ratio of 19.4 times for FY25 earnings per share.

While this may paint a rather bearish picture of the group’s outlook, there are in fact some bright spots for PIE.

Tradeview Capital senior analyst Tan Jia Hui, who covers the stock, points out that PIE has the strong support of its parent company, Foxconn Technology Group, more formally known as Hon Hai Precision Industry Co Ltd.

PIE is 51.4% owned by Pan-International Industrial Corp, a Taiwan-listed company.

In turn, the latter is 27.3% owned by iPhone maker Foxconn, making PIE an indirect subsidiary of Foxconn.

In fact, PIE is currently in advanced talks with 10 potential new customers, primarily linked to Foxconn, which is actively pursuing a China+1 and Vietnam+1 diversification strategy.

“Foxconn’s involvement is a key mitigating factor, having facilitated the introduction of new customers to PIE amid ongoing trade diversion under the China+1 and Vietnam+1 strategies.

“In addition, Foxconn provides valuable technical support through cost-efficient automation initiatives and talent transfers from its engineering network.

“With regards to the onboarding of these 10 new customers, management indicated that securing just two would be sufficient to fill its production capacity,” Tan tells StarBiz 7.

On this note, Kenanga Research said PIE currently has about 35,400 sq m of available production space across its Plant 1, Plant 3, Plant 5, and Plant 6 facilities – representing about 30% of its total manufacturing footprint.

Notably, PIE had previously indicated that a significant portion of Plant 6’s capacity will be allocated to Customer H’s server and switch assembly business.

However, with the server-related talks put on hold, the initially reserved space will now be considered for alternative prospects.

“There is still significant unutilised capacity, especially at Plant 6.

“Nonetheless, the group plans to allocate Plant 6 to the aforementioned potential new customers, who are expected to onboard in the near term.

“In the meantime, PIE’s switches-related orders with Customer H are still ongoing. Moreover, the group has also secured a new US-based network switch customer,” Tan says.

Tan adds that beyond PIE’s affiliation with Foxconn, the company also possesses its own competitive strengths, including technological capabilities and execution know-how.

“This enables the group to independently attract and serve customers and ready production space for new customers,” she says.

On the whole, companies in the EMS sector are experiencing mixed prospects, with those heavily skewed towards consumer electronics still impacted by weaker sentiment, with no clear signs of recovery, Tan points out.

Hence, PIE’s exposure towards the industrial segment, such as AI servers and switches, will help buffer the group against the cyclical downturn in consumer electronics.

“While the AI segment’s current revenue contribution is still modest, PIE is actively courting new high-margin customers across diversified sectors such as automotive, robotics, and DCs, which will provide resilience despite broader challenges,” she explains.

Additionally, Tan notes that orders from existing customers continue to flow in.

Notably, the expansion of Plant 5 – which will increase the plant’s floor space by about 50% – is progressing well and is expected to be operational by 3Q25.

This expansion is primarily to support the growing demand from Customer A.

That said, Tan has a “hold” call on PIE with a TP of RM4.28.

The analyst remains “cautiously optimistic” about the group’s outlook, despite uncertainties surrounding trade tariffs and macroeconomic conditions.

“A re-rating catalyst would be the onboarding of new customers,” she concludes.