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Investors’ Corner (Hi-P International, Memtech International, SPH REIT, Dairy Farm International Holdings)

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Hi-P International
Price – $0.92
Target – $0.84

Hi-P International (HIP) lowered its earnings guidance for the second time this year expecting lower sales and profit in 3Q18. The guidance cut is due to a delay in billing for certain production tools, lower yields for products undergoing ramp-up as well as lower market demand for certain products. The latter two reasons may be a double-whammy that further accelerates a decline in HIP’s profitability, whose margins are already under pressure given its large fixed cost base amidst an environment of intense pricing competition. As 3Q is typically HIP’s strongest quarter with the group ramping up production to meet seasonal holiday demand, the latest guidance cut is an indication that the demand outlook has deteriorated much faster than we expected. In view of the weaker demand outlook, we slashed our FY18-20E EPS by 25-32%. Maintain HOLD. Maybank Kim Eng (15 Oct).

Memtech International
Price – $0.85
Target – $0.95

Memtech International’s (Memtech) gross margin weakened in 2Q18 attributable to higher costs of raw materials – silicone rubber and plastic resin, whose prices remain elevated due to supply shortages from a factory shutdown and higher oil prices. Meanwhile, tighter regulations from the Chinese authorities and more stringent environmental rules could increase future operating costs of Memtech. Although 2018 is likely to be a soft year because of the weaker consumer sentiment, operations could improve from 2019 driven by more new projects and mass production in the automobile and consumer electronics segments. Based on peers’ average 2018F P/E of 9.8 times following the sector’s de-rating, we cut Memtech’s target price by 12% to $0.95. Maintain HOLD. UOB-Kay Hian (12 Oct)

Price – $0.985
Target – $0.99

SPH REIT’s 4Q18 results were within our expectations. Gross revenue and DPU grew 0.2% and 0.7% respectively aided by the maiden contribution from The Rail Mall (TRM) acquired in Jun-18, which helped to offset the 2.2% dip in gross revenue from Paragon. Although rental reversions came in negative for Paragon in FY18, we are encouraged to see that the magnitude of decline has moderated over the quarters. TRM has 41.5% of its leases by gross rental income expiring in FY19. While this may pose as a concern to some investors, we believe that it also presents an opportunity for SPH REIT to reinvigorate the mall by improving on the tenancy mix when the leases expire. Currently, around 40% of the TRM’s space is taken up by F&B tenants and SPH REIT intends to keep this as the dominant trade sector going forward. Maintain HOLD. OCBC Investment (12 Oct)

Dairy Farm International Holdings
Price – US$9.13
Target – US$9.60

Recently there was an unofficial post on Facebook which suggested that seven Giant supermarket outlets in Singapore could be closed. Of these, one at Junction 10 and another at Jalan Tenteram have already been closed while the Vivocity outlet is officially slated to shut down early next year. Although the post was not made by Dairy Farm International Holdings (Dairy Farm), we believe that the move is in line with management’s guidance to close or relocate underperforming stores. 2H18 margins could be negatively affected by the clearance of stocks for the closing stores. Moreover, sales figures at existing stores are also not likely to pick up substantially to cover the shortfall as the supermarket industry in Singapore has been flattish. Furthermore, the group’s larger-format stores in Hong Kong also saw an uptrend in rental rates in 1H18. As a result, we think it will be hard for Diary Farm to show decent improvement in its food division margins in 2H18. Maintain NEUTRAL. RHB Research (8 Oct)

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