HI-P (Lim&Tan)

S$0.61-HIPS.SI

? Hi-P restarted their share buy back program yesterday, having bought 129,000 shares at 60 cents each.

? Their buy back represented 13% of yesterday’s volume of 1,023,000 which is low compared to as much as 70-80% in their past buy back programs.

? This is the first buy back since the company last did on 25 Feb’11 when they bought 168,000 shares at S$1.18 each.

? This being the first buy back, it would likely be too early to judge how successful and powerful it would be in terms of benefitting its share price.

? However, in an overall weak market yesterday (where the Singapore index fell almost 1%), Hi-P’s share price had already outperformed significantly, having risen 7% on just over 1mln shares traded, above its 6 month average of 300,000 shares.

? This is likely due to the fact that the company’s last share buy back program done between June’10 till Feb’11 had seen the stock rise significantly from the 50 cents level to S$1.20, and since the company is again restarting its share buy back program around the same level as their last buy back program, the market would likely see it as a powerful early signal again.

? And both times the company is starting its buy back program when its cash holding accounts for about 40+% of its share price.

? The last time when the company started their share buy back in June’10 till Feb’11, the company’s bottomline swung from its first ever loss in 1Q’10 to hit a record profit of S$36mln in 4Q’10 on the back of maiden contributions from Apple as well as ramp up of shipments from Research In Motion (RIM).

? This time however, management is warning about continued pricing pressures from customers and European analysts are concerned that RIM has missed the window of opportunity presented by Nokia’s falling on hard times.

? Management expect profit to improve in 4Q’11 over 3Q’11’s depressed S$6+mln, but it will not reach 4Q’10’s record S$36mln as well as their usual range of S$20+mln due to continued pricing pressures from key customers, consolidation and impairment charges, rising commodity & labor costs, uncertain macro environment as well as volatile forex rate.

? It is useful to recall how the last share buy back program had pushed the stock above the multi-month range of 50-75 cents, which suggests the 75 cents area would likely present some technical resistance this time around unless of course the operating environment were to improve so dramatically, accompanied by some big order wins for Hi-P.

? However, at 0.9x price to book, which is below its historical average of 1.2x coupled with the company having restarted their share buy back program, we are reinstating our BUY recommendation on the stock. (With the latest book value of 70.65 cents a share, 1.2x price to book translates to 85 cents while at the S$1.24 high in Feb’11, price to book was 1.8x).