CEI Limited - CIMB Research 2017-07-04: Tech Dividend Aristocrat

CEI LIMITED AVV.SI

CEI Limited - Tech Dividend Aristocrat

Although CEI's share price has gained 34% YTD and 38% since our initiation in Sep 2016, we think CEI remains attractive as a dividend and potential M&A play. Maintain Add.
We think a higher dividend payout than our FY17-19F forecast of 80% is possible, given its minimal capex needs and strong cash generation.

Healthy fundamentals, fragmented shareholdings and low valuations make CEI an attractive M&A target, in our view.
We project resilient earnings, with 7.4% 3-year EPS CAGR (FY16-19F).
Our FY17-19F forecasts and target price of S$1.11 (9.2x FY18F P/E) are unchanged.

An established contract manufacturer with track record of more than 26 years and 70 customers, CEI has c.50% sales exposure to the medtech/life science sector. This has contributed to its steady sales growth over many years.
Its topline crossed the S$100m mark in FY11, and has consistently stayed above this level since then.
New customer/order wins, coupled with sales recovery from its major oil & gas customer, could nudge its topline towards S$150m before FY19F, in our view.

CEI paid 10 Scts DPS in FY16, almost 100% of its net profit, translating into 9.3% dividend yield, the highest among Singapore-listed tech stocks. Based on an 80% payout ratio, we forecast dividend yields of 8.4-9.8% for FY17-19F.
Given its cash-generative business, limited capex needs and S$9.2m net cash at end-2016, we do not rule out higher dividend payout ratio in FY17F, which would support its near-term share price.

We think CEI could be an attractive M&A target, given its diverse customer base, robust cash-generation capability and fragmented shareholding structure; especially for PE firms and peers looking to expand their geographical footprints.
Its valuation also looks attractive as the stock currently trades at 8.8x FY18F P/E, in line with its 10-year historical average, but at a 30% discount to the global industry average of 12.6x.

We expect CEI to record a high-single-digit EPS growth yoy in FY17-19F, underpinned by slight sales growth and margin improvements. While such earnings prospects are unexciting vs. its peers, its profitability record has shown resilience since FY04.
The company had an order book of S$46.8m as at end-Dec 2016 (vs S$49.0m at end-Dec 2015), which we expect to be fulfilled in FY17F.

We retain our FY17-19F forecasts, Add call and target price of S$1.11, pegged to 9.2x FY18F P/E (historical 10-year average P/E).
Downside risks to our Add rating are unexpected order pushback and unfavourable forex movements of regional currencies against the US$.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-07-04

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.110 Same 1.110