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Broker's take: Maybank upgrades Hi-P International to 'hold' as 'worst appears over'

MAYBANK Kim Eng Research has upgraded Hi-P International from "sell" to "hold", citing the management's belief that the worst of pricing pressure issues are over.

Maybank still expects earnings growth for FY2019 to be limited compared to FY2018.

The research unit noted that while Hi-P's 2018 fourth quarter core Patmi (profit after tax and minority interests) fell 35.2 per cent year-on-year (yoy) to S$38.7 million, it rose 14.4 per cent from the previous quarter due to stronger-than-expected volumes and margins.

Maybank raised its estimated FY2019/2020 earnings for the local contract manufacturer by 59 to 67 per cent to reflect stronger volumes, driven by new and existing customers and higher profit margins.

It raised its target price by 79 per cent to S$1.22 from S$0.68 previously.

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It noted that even though Hi-P's fourth-quarter revenue fell 10 per cent yoy due to weaker pricing and volumes, it rose 17 per cent compared to the third quarter, which is traditionally stronger. Management attributed it to "firm execution across the board, such as strong efforts to gain volume, increased operating efficiency, and excellent response to challenges".

To combat macro uncertainties amid the trade war, Hi-P aggressively pursued more projects and increased allocation with key wireless customers. It has expressed confidence in delivering similar revenue and sales numbers in 2019 as 2018.

The manufacturer expects lower net profit for the first quarter of 2019 compared to the year-ago period despite similar revenue estimates. Maybank believes this is due to healthier pricing dynamics in 2018's first quarter.

The research unit noted a further upside potential to its estimates if the business environment remains strong for Hi-P in the second half of 2019, as it expects this period to account for 70 to 80 per cent of Hi-P's earnings for the year. 

Hi-P's capacity expansion in Thailand will be completed in the second quarter of 2019, and production for one or two new projects will begin in the second half of the current fiscal year.

The company also reiterated plans for merger and acquisitions to access growth opportunities in automotive, medical and IOT ecosystems.

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