Excerpts from Maybank Kim Eng's report
Analysts: Neel Sinha & Lai Gene Lih
Hi-P’s medium-term growth strategy is to expand to EMS for automotive and healthcare segments. Given the long certification lead times involved in these sectors, management plans to accelerate market entry through M&A with ticket sizes up of to cSGD100m each over the next two years.
M&A will largely be funded by internally generated cash and treasury shares (80.7m), although the company is open to taking on some debt too. For the near term, i.e. FY17, management expects sales to be flattish YoY but is guiding for net profit growth from a shift in product mix towards higher component manufacturing (low revenue, high margin) over assembly work (high revenue, low margin).
Overall capacity utilisation stands at 30-40% currently but is forecast to rise to c70% levels in 3Q17 ahead of the year-end holiday season.
The ghosts of Yota have been buried
New segments, M&A now a part of growth strategy
Trading at 11.8X forward PE
"Valuation: The stock is thinly followed. Based on the FY17 EPS forecast of a single consensus estimate, Hi-P trades at 11.8x forward P/E vs its Singapore peer basket of c14.5x."
The chapter on assembling Yotaphone2 (which led to FY15 losses from SGD74.4m in inventory write-offs alone) was closed in Jan-2017 with an out-of-court settlement of USD17m. Management indicated residual inventory had been sold and there was zero additional provisioning risk from this project.
This was a key learning lesson for Hi-P leading to the implementation of ERM systems and adoption of a risk-weighted total exposure approach to evaluate clients.
Full report here.