Phillip Capital Initiates Coverage On Cape EMS With BUY Rating

Photo from Cape EMS Website

Cape EMS Berhad, a Johor-based contract manufacturer’s growth compelling with attractive valuation, as it has benefitted from the on-going US-China trade war, according to Phillip Capital.

The research house has initiated coverage on Cape EMS with a BUY rating, with a 12-month TP of RM1.90, based on 22x target PE multiple on 2024E EPS or -1SD the industrial EMS sector mean PE.

“Overall, we project a 3-year 2022–25E net profit CAGR of 51% underpinned by higher demand from the trade-diversion play, significant expansion of current production floorspace, up by 70% by of end of 2023.

“(Additionally), the margin expansion from a favourable revenue mix, higher value products and better production automation efficiency,” the research house said today (Nov 21)

“We like Cape EMS for its strong earnings growth profile, entrepreneurial management team, and diversified portfolio mix leveraging on key secular growth trends.”

The risk to its call include weaker customer demand.

Phillip Capital said the group has done well, growing net profit at a 3-year CAGR of 106% from 2019 since its chief executive officer, Christina Tee and her partners took over and restructured back in 2013.

“The success can be attributed to the escalating US–China tension war which began in 2019, leading MNCs to diversify their manufacturing
operations to Malaysia,” it said.

The research house also said that the rising 5G adoption, increasing optical modules demand, rapid EV penetration infrastructure expansion, and shift in smokers’ preference towards e-cigarettes are expected to drive the group’s earnings growth in the years ahead.

“With the acceleration in global EV demand, we believe the EV segment will be the fastest growth area for CAPE, from a mere 1% contribution in 2022 to an estimated 32% of overall group revenue in 2024E,” it added.

In a Bursa filing yesterday, Cape EMS posted its third quarter financial results ended Sept 30, 2023, and net profit has increased to RM15.21mil from RM10.38mil in the previous year.

The group’s basic earnings per share stood at 1.65 sen compared to 1.38 sen previously.

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