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HI-P: NRA initiates coverage with ‘Buy’; 94-ct px tgt means 41% upside
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Written by Sim Kih
Tuesday, 11 August 2009 18:00
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Hi-P's dividend payout ratio will be maintained and excess cash will be for M&A, says executive chairman, Yao Hsiao Tung. Photo by Sim Kih

THREE ANALYSTS have just issued ‘Outperform’ and ‘Buy’ calls on Hi-P despite weaker year-on-year 2Q09 results by the electronics contract manufacturer.

1H09 revenues of the turnkey contract manufacturer fell 36.9% yoy to S$177.6 million, and profits attributable to shareholders fell 41% to S$16.0 million.

Nevertheless, net earnings were above consensus estimates, thanks to tighter cost control.

In a recent development, Hi-P also announced this month the acquisition of a flexible printed circuit board (FPCB) business, Jiamao, for Rmb 275.9 million (about S$60 million).

Hi-P provides vertically-integrated subcontract manufacturing services which include product design, tool design and fabrication, mass production, assembly and supply chain management for the telecommunications, consumer electronics, data storage, medical and automotive industries.

”New projects on smart phones, notebooks and MP3 players will be ramped up in 4Q09,” said its executive chairman, Yao Hsiao Tung, at a briefing for analysts last week.


Report date

BrokerCallTarget Price
4 Aug 2009Credit SuisseOutperform90 cents
5 Aug 2009NRA CapitalBuy94 cents
5 Aug 2009DBS VickersBuy76 cents
  

Consensus

87 cents


NRA Capital (analyst: Jacky Lee)
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Jacky Lee's target price of 94 cents issued on 5 Aug is the most bullish.

NRA Capital’s Jacky Lee initiated coverage with a ‘Buy’ call a day after its 2Q09 results announcement.  His target price is 94 cents, based on sector average price-to-book value of 1.3 times.

The analyst also noted that even though Hi-P's market cap is small relative to peers such as Venture or Flextronics, its ROE of 22% is the highest.

The 94-cent target price translates to an upside of 41% based on last close price of 66.5 cents, and is well above consensus target of 87 cents.

The analyst likes Hi-P for the following reasons:

(1) Strong cash flow
Free cash flow in 2Q09 was S$71 million, while the cash conversion cycle was shortened by 20 days quarter-on-quarter.  Net cash from operations more than doubled to S$75.4 million.  Gearing is low at 0.8%.  Net cash reserves as at 30 Jun 2009 were S$251 million, or 42.5% of its market cap after 6 consecutive quarters of free cash flow generation.

(2) Margin expansion
Gross profit margins improved 4.9 percentage points to 22.8% and 3 ppt qoq to 20.1%.  The company had better product mix after introducing more valued-added processes and tightening its cost control.

(3) Positive on new business segment
Hi-P's clients are global consumer behemoths ranging from mobile phone makers such Research in Motion (Blackberry fame), Nokia, and Motorola, to electronic shaving razor maker, Gillette.

Jacky views Hi-P’s recent acquisition of license for FPCB manufacturing and the relevant fixed assets as a positive development that should boost its electronics capabilities.

Risks cited by NRA are: firstly, reliance on two major customers, and secondly, a global economic recovery that is slower than expected.  Research in Motion and Procter & Gamble (which owns Gillette) account for more than half of Hi-P’s revenues.
 
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Research in Motion's BlackBerry Pearl 8220's flip cover design requires the use of a flexible printed circuit board.

Credit Suisse (analyst: Chua Su Tye)

Credit Suisse analyst Chua Su Tye maintained his ‘Outperform’ call on Hi-P and raised his target price more than 50% to 90 cents.

The analyst likes Hi-P for the following reasons:

(1) Undemanding valuation of 5X PE
Su Tye’s target price of 90 cents is pegged to a PE of 8 times, which is at a 40% discount to the larger and more liquid Venture.

(2) Strong cash reserves and strong cash flow

(3) Expected revenue boost from new FPCB segment
The analyst also noted that Hi-P’s newly acquired FPCB business is one that has been certified by Hi-P’s key customers.

The key risk cited is a slower-than-expected ramp-up by key clients.


DBS Vickers (analysts: Suvro Sarkar/Tan Ai Teng)

DBS Vickers analyst Tan Ai Teng and Suvro Sarkar maintained the house’s ‘Buy’ call on Hi-P, but lowered target price to 76 cents.  The price target is pegged at 9 times blended FY09/10 earnings.

The analysts like Hi-P for the following reasons:

(1) Further margin expansion and cash generation in 2Q09
(2) Customers are positive on its FPCB expansion
(3) Valuation of 4.5X FY09 PE is compelling compared to historical average of 9X PE.


Related story: HI-P INT'L: Chairman is still fighting fit at 69
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