HI-P INTERNATIONAL LIMITED (SGX:H17)
Hi-P International - Take Profit
Overvalued; Downgrade to SELL from HOLD
- Hi-P’s share price has gained 47% since 22-Feb (post-results), outperforming SGX-listed peers. Except for the resignation of the deputy CEO (see Hi-P's announcements dated 31-Mar-2019), there were no material announcements to suggest a shift in fundamentals.
- Amid guidance for flat y-o-y earnings, the stock appears overvalued at 14x FY19E P/E vs global peers' at 10.5x, and its own 1SD above 3-year mean of 12.3x. Hence, we downgrade Hi-P International (SGX:H17) to SELL from HOLD. ROE-g/COE-g Target Price stays at SGD1.22, based on 1.5x FY19E P/BV.
- Prefer Valuetronics (SGX:BN2) (Rating: BUY, Target Price: SGD1.05, see report: Valuetronics - Printed Circuit Box Assembly Allocation Risks Priced In) for Singapore tech sector exposure.
- Risks include stronger-than-expected sales volumes and material contract wins.
Share price imply lofty 20-23% FY18-21E EPS CAGR
- We see two possible reasons for the outperformance.
- First, the market may be potentially expecting a share transaction involving Hi-P shares from majority shareholder, chairman and CEO, Mr. Yao (see Hi-P's announcements dated 27-Nov-2019). Regardless of whether a transaction materializes, this does not affect our fundamental valuation of the stock.
- Second, the market may be pricing-in a stronger than expected fundamental outlook. However, guidance for 1Q19E/FY19E earnings to be lower/flat y-o-y have not been changed.
- To justify the current Hi-P’s share price, our ROE-g/COE-g methodology implies that Hi-P will have to deliver FY18-21E earnings CAGR of 20-23%. In view of still challenging operating environment, we believe such earnings expectations may be difficult to achieve.
- See attached PDF report for Hi-P’s peers comparison table.
Succession-planning hiccup
- In addition, the market may also be concerned about potential uccession-planning challenges at Hi-P. Deputy CEO, Mark Su, has resigned to pursue other interests, after only 5 months into his job. This is Hi-P’s second high-profile management departure in 1-2 years.
- In Feb-18, former COO Yong Inn Nam resigned 4 months after his appointment.
Risks to our view
- While the worst may appear over for Hi-P, we believe Hi-P’s share price has run ahead of fundamentals.
- Risks to our view include:
- stronger-than-expected volumes from new customers and allocations; and
- potential material contract wins not yet in management’s guidance.
Lai Gene Lih CFA
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2019-04-08
SGX Stock
Analyst Report
1.220
SAME
1.220
