Interplex Holdings Ltd. - Growth with Better Earnings Quality


Maintain BUY on quality earnings growth
While revenue growth is projected  to be fairly modest due to a mixed outlook for its various segments, we  expect greater operational efficiencies to lift net margins from 4.5% in FY15 to 6.1% in FY18, driving core net earnings at 14.9% CAGR. At just 5.9x  FY16 PE, we rate Interplex Holdings a BUY with 19% upside to TP of $0.83,  based on 7x FY16 PE. A decent prospective yield of 5.1% is also on offer.

While revenue growth is projected to be modest…
While single-digit growth  is expected for various core segments (automotives, industrial products,  etc), uncertainties surround the end-demand for others (mass storage,  imaging, etc) – weighing on overall revenue growth.

…Opportunities for cross-selling and cost-cuts should lift margins and boost earnings
As the Group leverages on Interplex Industries'  relationship with leading OEMs to exploit cross-selling opportunities and  amid consolidation of operations, we expect net margins improvement from  c.4.5% in FY15 to c.6.1% in FY18, which could help grow core earnings by  c.51.9% from US$40.4m in FY15 to US$61.4m in FY18, along with revenue improvement of c.4.1%.

Technical Analysis
Daily Chart
Valuation:
Maintain BUY, TP of S$0.83. We have lowered our target price to S$0.83,  which is pegged at 7x FY16F PE from 11x previously as peers have since  de-rated. Similar to the historical average, this implies a 36% discount to  larger peers. Against core EPS growth of 14.9% CAGR, we believe our  valuation multiple of 7x earnings is reasonable.? Share price should rerate  as earnings are delivered.

Key Risks to Our View:
Slowdown in the global economy could pose significant challenges. Segments  such as consumer electronics and automotives are subject to fluctuations in  discretionary spending, which puts pressure on profits during slowdowns. (Read Report)

Source : DBS Group Research

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