Hi-P International - Maybank Kim Eng 2020-02-18: Outlook Still Challenging

HI-P INTERNATIONAL LIMITED (SGX:H17)

Hi-P International - Outlook Still Challenging

Contrasting our expectations of an earnings recovery in FY20E, Hi-P International (SGX:H17) guided for net profit to be lower than FY19. As such we lower FY20-21E EPS by 20-28%.

4Q19 core net profit dropped 42% y-o-y to SGD22.4m, falling short of our expectations. We maintain SELL on Hi-P International with lower ROE-g/COE-g Target Price of SGD1.00, now based on 1.2x FY20E P/B (prev: 1.5x) as the challenging outlook persists.
Prefer Venture Corp (SGX:V03) (BUY, Target Price SGD18.23) as we believe earnings recovery could materialise in 2H20.

Hi-P International's 4Q19 revenue fell 10% due to pricing pressure and lower sales volumes for certain customers. Amid increasingly competitive pricing and negative operating leverage, gross margin fell 3.8ppt to 13.9%. However, it was higher than expected effective tax rate at 22.8% (+4ppt y-o-y) that resulted in Hi-P International falling short of our expectations, due to a few non-deductible items.
We are assuming normalised tax rate of 17-18% in FY20-22E.

Hi-P International is expecting lower profit in FY20E despite higher revenue due to
1. persisting pricing pressure, in particular with the key wireless customer; and
2. increased contributions from Keurig assembly projects, which yield lower margin.
The guidance has also factored in management’s assessment of supply chain disruptions as a result of Covid-19.
If the pricing environment results in unsustainable returns, competitors may cut back on capex. This may be a sign that could restore demand-supply balance, in turn improve pricing. However, management currently views this to occur only in FY21E at the earliest.

Hi-P International is currently trading at 14.4x FY20E P/E, around +1SD above its four-year mean of 10x.
See Hi-P International Share Price; Hi-P International Target Price; Hi-P International Analyst Reports; Hi-P International Dividend History; Hi-P International Announcements; Hi-P International Latest News.
We believe key risks to our view include
- accretive M&As – for which Hi-P International will likely use cash instead of shares as currency; and
- large order wins not accounted for in current guidance.

Lai Gene Lih CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-02-18

SGX Stock Analyst Report SELL MAINTAIN SELL 1.00 DOWN 1.340