Interplex Holdings Ltd - DBS Research 2015-10-23: Growth with Better Earnings Quality

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INTERPLEX HOLDINGS LTD. M1P.SI 

Interplex Holdings Ltd - GROWTH WITH BETTER EARNINGS QUALITY 

Maintain BUY on quality earnings growth 

• While revenue growth is projected to be fairly modest due to a mixed outlook for its various segments, we expect greater operational efficiencies to lift net margins from 4.5% in FY15 to 6.1% in FY18, driving core net earnings at 14.9% CAGR. 
• At just 5.9x FY16 PE, we rate Interplex Holdings a BUY with 19% upside to TP of $0.83, based on 7x FY16 PE. 
• A decent prospective yield of 5.1% is also on offer. 

While revenue growth is projected to be modest... 

• While single-digit growth is expected for various core segments (automotives, industrial products, etc), uncertainties surround the end-demand for others (mass storage, imaging, etc) – weighing on overall revenue growth. 

...Opportunities for cross-selling and cost-cuts should lift margins and boost earnings. 

• As the Group leverages on Interplex Industries’ relationship with leading OEMs to exploit cross-selling opportunities and amid consolidation of operations, we expect net margins improvement from c.4.5% in FY15 to c.6.1% in FY18, which could help grow core earnings by c.51.9% from US$40.4m in FY15 to US$61.4m in FY18, along with revenue improvement of c.4.1%. 

Valuation: 

Maintain BUY,TP of S$0.83. 

• We have lowered our target price to S$0.83, which is pegged at 7x FY16F PE from 11x previously as peers have since de-rated. Similar to the historical average, this implies a 36% discount to larger peers. 
• Against core EPS growth of 14.9% CAGR, we believe our valuation multiple of 7x earnings is reasonable. 
• Share price should rerate as earnings are delivered. 

Key Risks to Our View: 

• Slowdown in the global economy Slowdown in the global economy could pose significant challenges. Segments such as consumer electronics and automotives are subject to fluctuations in discretionary spending, which puts pressure on profits during slowdowns.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2015-10-23

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.83 Down 0.85