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

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.

Proxy for medtech and life science 

  • 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.

Share price driver #1: Highest dividend yield among tech stocks 

  • 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.

Share price driver #2: Potential M&A 

  • 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.

No exceptional growth but resilient earnings 

  • 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.

Maintain Add 

  • 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