Hi-P International - Maybank Kim Eng 2019-05-06: No Winds Of Change

HI-P INTERNATIONAL LIMITED (SGX:H17)

Hi-P International - No Winds Of Change

HI-P INTERNATIONAL LIMITED (SGX:H17)'s 1Q19 PATMI of SGD10.7m, up 5.7% y-o-y, was ahead of our expectation, though in line with Hi-P International’s revised guidance.
The outperformance came from a 70% reduction in net FX losses, including from derivative hedging.
As Hi-P International maintained its FY19 guidance of similar y-o-y revenue and profit, our forecasts and ROE-g/COE-g Target Price of SGD1.22 (1.5x FY19E P/BV) are intact.

Amid expectations for flat y-o-y earnings, the valuation is stretched at 12x FY19E P/E, nearly 1SD above its 3-year mean of 8.8x. Maintain SELL.

Excluding FX losses and derivative hedging, Hi-P International's 1Q19 EBIT fell 18% y-o-y. This was due to:
1. a 0.8ppt erosion in gross margins to 12.6% from pricing pressure and a less favourable product mix; and
2. a 20.7% increase in SG&A costs due to lower bonus reversals in 1Q19.
Revenue inched up 2% y-o-y, as increased contributions from lower-margin assembly products offset declines from its key wireless customer.

Hi-P International says its outlook is increasingly competitive. Pricing pressure remains from its key wireless customer. Hi-P International expects this to be offset by:
1. growth from other customers, such as Keurig and P&G; and
2. operating efficiencies.
As such, management expects flat y-o-y FY19 revenue and earnings. It has guided for lower y-o-y 2Q19 revenue but similar earnings. This is because it expects gross margins to normalise to low teens from 9.8% last year from improved efficiencies.

Chairman, CEO and majority owner Mr Yao clarified that he had plans to privatise the company earlier but has changed his mind. While he may consider reducing part of his stake to boost free float, his present focus is to steer Hi-P International through the volatile environment.
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/ 2019-05-06

SGX Stock Analyst Report SELL MAINTAIN SELL 1.220 SAME 1.220