SINGAPORE (Feb 18): Maybank Kim Eng Research is reiterating its “sell” call on Hi-P International, and has slashed its target price to $1.00, representing a 22% downside for the stock.
In a Tuesday report, lead analyst Lai Gene Lih notes that the group’s results for 4QFY2019 ended December had fallen short of the brokerage’s expectations.
The group saw its earnings halved to $22.4 million from $44.8 million in the previous year, while revenue for the quarter fell 10.2% to $396.9 million on the back of pricing pressure and lower sales volumes for certain customers.
See: Hi-P's 4Q earnings halved to $22.4 mil amid price pressure, lower sales volume
“Contrasting our expectations of an earnings recovery in FY20E, Hi-P guided for net profit to be lower than FY19. As such we lower FY20-21E earnings per share (EPS) by 20-28%,” says Lai.
Lai adds that the increasingly competitive pricing and negative operating leverage also led to a 3.8 ppt decline in Hi-P’s gross margin to 13.9%.
Looking ahead, Hi-P is expecting lower profit in FY2020, despite higher revenue. The way Lai sees it, this could be due primarily to a combination of persisting pricing pressure, in particular with the key wireless customer, as well as increased contributions from Keurig assembly projects, which yield lower margins.
Lai notes that the group should also brace itself for the effects of the Covid-19 outbreak.
“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,” says Lai.
“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,” he adds.
However, Lai identifies some positive notes for Hi-P amid the virus outbreak that has sent most companies with operations in China into disarray.
For one, the group’s factories in China have gradually resumed operations following government-mandated closure from Feb 3 to Feb 9. The group has also prepared some buffer stock ahead of the Lunar New Year, which could limit the impact of shut operations throughout the extended holiday period.
“However, we remain cautious on Hi-P as for certain products, Hi-P is exposed to long supply chains that may currently be facing production bottlenecks as a result of Covid-19,” says Lai.
Lai shares that some upside factors for the stock include better-than-expected orders and execution from existing projects, new customer wins and projects, as well as improved communication regarding strategy and cost-control efforts.
On the flipside, market share losses and/or payment defaults from customers, as well as sudden and steep declines in the USD and SGD could pose downside risks to the stock.
As at 11.15am, shares in Hi-P International are trading three cents lower, or 2.3% down, at $1.28. This translates to a price-to-earnings (P/E) ratio of 14.1 times and a dividend yield of 1.9% for FY20E according to Maybank valuations.
