Hi-P International - Maybank Kim Eng 2019-04-08: Take Profit


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:
    1. stronger-than-expected volumes from new customers and allocations; and
    2. potential material contract wins not yet in management’s guidance.

Lai Gene Lih CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-04-08
SGX Stock Analyst Report SELL DOWNGRADE HOLD 1.220 SAME 1.220