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Hot stock: Hi-P shares down 7.4% following Maybank Kim Eng's downgrade to 'sell'

HI-P International shares have taken a hit in Tuesday's early session following Maybank Kim Eng's call to downgrade the contract manufacturer's stock to "sell" with a target price of S$1.22, as it appears overvalued compared to its global peers.

At the midday break, Hi-P was down S$0.12 or 7.4 per cent at S$1.51, with 10.1 million shares changing hands.

DBS Equity Research said in its stock pulse report that based on technical analysis, Hi-P was trading "sell" with a downside risk to S$1.46, and if price correction extends beyond that, a further weakness to S$1.28-1.32 may be seen.

DBS added that in light of the stock trending down since Monday, the daily moving average convergence divergence and 14-day relative strength index of Hi-P is moving away from being overbought.

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In the Maybank Kim Eng report, analyst Lai Gene Lih noted that Hi-P has outperformed its Singapore-listed peers, gaining 47 per cent since posting its full-year results (Feb 21 after market close) and April 8. The brokerage has recommended investors take profit following its recent rally.

Maybank Kim Eng cited two possible reasons for Hi-P's outperformance.

This includes the possibility that market watchers are expecting a share transaction involving Hi-P shares from majority shareholder, chairman and chief executive officer (CEO), Yao Hsiao Tung. Mr Lai believes that regardless of whether the transaction materialises or not, it will not affect the brokerage's fundamental valuation of the stock.

The market may also be pricing in a stronger than expected fundamental outlook, despite guidance for flat year-on-year earnings.

Based on Monday's closing price of S$1.63, Mr Lai said that the stock appears overvalued at 14 times the FY2019 estimated earnings against its global peers' at 10.5 times, and is also one standard deviation above Hi-P's three-year mean of 12.3 times.

The Maybank Kim Eng report also said that the market might be concerned about potential succession-planning challenges at Hi-P.

On March 31, the company said that deputy CEO Mark Su has resigned - five months into his role - to pursue other interests. In February 2018, former chief operating officer Yong Inn Nam resigned four months after being appointed.

Mr Lai said that "other than the resignation of the deputy CEO, there were no material announcements to suggest a shift in fundamentals".  

Risks to Maybank Kim Eng's view include stronger-than expected volumes from new customers and allocations, and potential material contract wins not yet in management’s guidance.