SINGAPORE (April 9): Maybank Kim Eng is downgrading its call on Hi-P International to “sell” from “hold” previously with an unchanged price target of $1.22, which is based on 1.5 times FY19E price-to-book value.

This is because the research house now deems Hi-P as overvalued at 14 times FY19E P/E versus its global peers’ 10.5 times, and its own 1 SD above the three-year mean of 12.3 times.

In a Monday report, analyst Lai Gene Lih notes that the stock has gained 47% to hit $1.68 since Feb 22, post the release of the group’s 4Q financials, to outperform its SGX-listed peers.

In his view, one possible reason for the outperformance is the potential expectation of a share transaction involving Hi-P shares from the group’s majority shareholder, chairman and CEO, Yao Hsiao Tung.

“Regardless of whether a transaction materialises, this does not affect our fundamental valuation of the stock,” says Lai.

Another factor could be that the market could be pricing in a stronger-than-expected fundamental outlook, although the analyst highlights a lack of recent material announcements to suggest a shift in the group’s fundamentals – save for the resignation of its deputy CEO, Mark Su.

“The market may also be concerned about potential succession-planning challenges at Hi-P. Deputy CEO, Mark Su, has resigned to pursue other interests, after only five months into his job. This is Hi-P’s second high-profile management departure in 1-2 years. In Feb-18, former COO Yong Inn Nam resigned four months after his appointment,” observes Lai.

“To justify the current share price, our ROE-g/COE-g methodology implies that Hi-P will have to deliver FY18-21E earnings CAGR of 20-23%. In view of still challenging operating environment, we believe such earnings expectations may be difficult to achieve,” he adds.

The analyst instead prefers Valuetronics for exposure to the Singapore tech sector. He rates the stock at “buy” with a target price of $1.05.  

As at 11:20am, shares in Hi-P are trading 7.4% lower at $1.51 or 1.89 times FY19E book value. Valuetronics is down by 1 cent at 69 cents.