HLN Technologies - Growth story advancing at full steam

􀂾 Story: HLN Technology has lost more than 20% in the last
three weeks. Apart from the generally weak market sentiment
over the past two days, our repeated checks with management did
not raise any red flags about the business operation. In fact, we
got a sense that growth momentum is intact and the business is
progressing very well when management presented during our
Pulse of Asia conference last week.
􀂾 Point: From the bullish outlook management gave for different
business divisions, we are confident HLN can meet our expectation
with a robust set of 1H07 results. Moreover, the company has
promising opportunities to further expand business with new
customers by cross-selling its suite of different services and
competencies.
􀂾 Relevance: We believe downside risk at this level is limited.
Strong results and/or major contract wins would be next trigger for
the stock, which is compelling at 7.3x FY08 earnings. Reiterate Buy
considering the stock’s attractive upside potential to our
unchanged target price of S$1.21.
Smartphone demand rising. This quarter is especially busy for HLN as it is
ramping production of elastomeric components for a smartphone, which
is newly launched in the Americas. Demand is apparently very strong as
allocated machines are operating at near full capacity and management
has placed orders for more machines to cope with rising orders. Based on
positive customer feedback, HLN is confident of securing more parts for
future models of smartphones and its proprietary chemical formulations
are likely to keep competition at bay as well as to sustain margins.
Set on winning more military orders. Meanwhile, the metallic division is
on track to complete the military vehicle orders in July and management is
positive of repeat orders. HLN currently supplies partially machined doors
for refurbishment. It aims to supply fully machined doors with additional
elastomeric gasket and/or other fittings to new vehicles as well.
Still on track to post a solid 1H. We are expecting 1H07 sales to grow
approximately 171% y-o-y to S$25m and net earnings to grow 48% to
S$2.2m. Key drivers would be higher polymeric sales and maiden
contributions from the military vehicle orders, machined weaponry sales
and machined parts for wafer process chamber.
Valuations undemanding vis-à-vis growth. HLN is cheap at 7.3x FY08 PER
and PEG of less than 0.1 against EPS CAGR of 87% over FY06-FY08F. Our
target valuation multiple of 12.0x FY08 earnings is pegged to sector
average. Although HLN may be smaller than its peers, we believe that this
target valuation is fair given the much stronger growth momentum in the
next two years. We believe delivery of strong earnings growth and
positive newsflow should provide a stock re-rating in due course.