Hi-P downgraded, earnings estimates slashed by Maybank KimEng

Singapore five-dollar note Photo by Leslie Shaffer

Maybank KimEng downgraded Hi-P International to Hold from Buy after slashing its earnings forecasts after the contract manufacturer lowered its earnings guidance.

It cut its earnings forecasts for 2018-20 by 35-45 percent and slashed its target price to S$1.45 from S$2.43.

“We would need to see a strong recovery in sentiment and volumes on the supply chains that Hi-P participates in before potentially turning positive on the stock,” the note on Friday said.

Hi-P on Wednesday reported its first-quarter net profit rose 19.9 percent on-year to S$10.1 million on revenue of S$281.096 million, up 15.1 percent on-year. But it added that it was lowering its outlook for 2018, saying it now expects similar revenue but lower profit for the full year, compared with 2017, citing uncertainty among its customers amid the threat of a looming trade war.

Maybank KimEng noted this was a negative revision from February, when Hi-P guided  for both revenue and profit to grow in 2018.

“As customers reduce their volume forecasts, price competition has intensified as well,” the brokerage said. It also noted that Hi-P’s foreign-exchange hedges, which cover 70-80 percent of its forex exposure, were a “double-edged sword,” as they mitigate further losses if the U.S. dollar continues to weaken against the Chinese yuan and the Singapore dollar, but also prevent a margin recovery if the U.S. dollar strengthens.

The brokerage also pointed to issues with a key wireless customer, which saw its smartphone average selling price fall 9 percent on-quarter in the first quarter, while it faced record-high inventory levels.

“Taken together, this may be an indication of a demand slowdown for the ultra-flagship smartphone that Hi-P makes small metal components for. If this negative pricing and volume trend persist into newer models, we are concerned this would offset the allocation gains in the form of a longer list of components Hi-P is involved in,” Maybank KimEng said.

The stock ended Friday down 7.01 percent at S$1.46.