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Thursday, February 24, 2011

HPI - Valuation and Recommendation unchanged (Jupiter)

We are not changing our net profit forecast of RM24.6m, but we believe if the company executes its expansion plans diligently, there would be room to upgrade our forecast. However, due to the dilutive effect of the private placement, EPS is downgraded to 41.7sen.

HPI’s net gearing of 0.7x remains on the high side, though at the moment interest coverage of 6x (effective interest rate of 5%) is not a cause of concern. Going forward, especially for the next few quarters, cash flow management would be critical, lest HPI faces a cash crunch as it needs added working capital to fund the upcoming plant in Parit Buntar. In the longer term, HPI would need to bolster its balance sheet to support its plans to be the dominant corrugated carton manufacturer in Malaysia; hence a cash call would be forthcoming.

Hence we are keeping our PER rating of 6x, and the fair value is reduced to RM2.50. Recommendation is downgraded to HOLD.

The stock surpassed our initial target price of RM2.75 to reach RM3.00 and is now retracing from the high. We believe the stock will consolidate around the current level and would find support at the 30D SMA. If the stock breaches the 30D SMA, the next level of support would be the RM2.00 level.

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