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Hot stock: Hi-P shares down 6% after flagging lower profit for Q3

SHARES of Hi-P International fell 6 per cent or S$0.055 to S$0.86 as of 10.29am on Monday, with 3.3 million shares changing hands, as the company lowered its earning guidance for the second time this year. 

The integrated contract manufacturing services provider expects lower revenue and profit for the third quarter of its 2018 financial year as compared to the same period a year ago, it said in a Singapore Exchange announcement on Sunday. This came after it said on Aug 1 that it expects higher revenue but similar profit for Q3FY18.

Hi-P said the difference between its unaudited results and the previous guidance was mainly due to the delay in sales resulting from postponement in billing of certain production tools, lower manufacturing yield for certain products during initial ramp up stage, and lower market demand for certain products.

Maybank Kim Eng kept its call at "hold", but slashed its 12-month target price by 34 per cent to S$0.84 from S$1.27. It also cut its forecast for Hi-P's earnings per share for FY2018 to FY2020 by 25 per cent to 32 per cent.

Maybank Kim Eng said that lower manufacturing yield and market demand may "further (accelerate)" a fall in HIP’s profitability.  "HIP’s margins are already under pressure given its large fixed cost base amid an environment of fierce pricing competition," analyst Lai Gene Lih said in a research note.

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"Since management has not quantified the impact of weaker demand we are worried the latest guidance cut is a sign the demand outlook has deteriorated much faster than we anticipated," he also said, noting that the third quarter is typically Hi-P's strongest season due to the ramping up of production to satisfy holiday demand.

Meanwhile, DBS kept its "buy" recommendation and target price of S$1.30 for the stock.

It also maintained its net earnings forecast of S$86.5m for FY18, as analyst Ling Lee Keng noted that Hi-P's delayed contracts are expected to be recognised in 4Q18.

"Current valuations of 8.5x and 8.4x for FY18F and FY19F respectively are attractive vs peers’ 15x and 12x," she said. "From a long term prospective, Hi-P is also trading below its historical average on a forward PE and P/BV basis."

Separately on Sunday, Hi-P said it has proposed to sell a 60 per cent stake in wholly-owned subsidiary Hi-Flex SZ to Electric Connector Technology.

DBS said the proposed sale is expected to be a boon to Hi-P. "ECT is a reputable electronics manufacturer with a strong record in the connector manufacturing business, which is synergistic to the PCB business. The new joint venture partner can also provide new business direction and strategy for Hi-Flex SZ," Ms Ling said.

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