Credit Suisse picks MMI, HLA as winners

Published February 1, 2006

MMI to ride on HDD growth, HLA on green pallet growth

By OH BOON PING

STRIKING a contrarian note, analysts at Credit Suisse have recommended mainboard-listed MMI Holdings as one of its favourite stocks that could exhibit significant upside potential given the right business environment this year.

In a Jan 25 report, Credit Suisse said that the electro-mechanical contract manufacturer will be a beneficiary of strong growth in the hard-disk drive (HDD) industry and the trend of rising equipment outsourcing to Asia.

Moreover, the report pointed out that MMI is also a likely gainer from the recent merger between Seagate Technology - MMI's major customer - and Maxtor Corp. Both firms operate hard disk drive factories here. Indeed, shares of Seagate suppliers MMI and Seksun rose soon after the Seagate-Maxtor announcement last month, while shares of Maxtor suppliers such as Jurong Tech and Brilliant took a hit. In the report, the analysts noted that MMI's counter currently trades at just six times its expected earnings per share (EPS) this year and yields four per cent. Furthermore, the company also has a return on equity of over 20 per cent, thereby making it 'a high return on equity company with strong company and industry fundamentals and is a ripe candidate for a re-rating, in our view,' the report concluded.

Last year, MMI reported an 89 per cent surge in its net profit to a record $38.5 million, fuelled by strong global demand for HDDs. Similarly, its annual revenue grew 23 per cent to reach an all-time high of $691.8 million.

Likewise, Credit Suisse also carries an 'outperform' rating on Hong Leong Asia (HLA), with a 12-month target price of $2.52, thanks to its environmentally-friendly pallet business, a recovery in other operations, and the recent divestment of its metal container and closure business. In particular, the report said that HLA's green-pallet business could earn $47 million in FY08. 'Even so, HLA's global pallet market share would be only about one per cent,' the report added. This comes even as that business segment could grow 'from commercial launch in 2005 to the largest contributor of earnings in three years' time'. HLA has interests in the green-pallet business through its subsidiary GPac Technology.

'Diesel engines are expected to recover from a deep cyclical downturn in FY05, and building materials are rebounding nicely too.'

- Credit Suisse on Hong Leong Asia

Credit Suisse said that even with GPac stripped out of this year's earnings, HLA's earnings is still expected to grow by over 80 per cent from its existing operations in FY06.

The report added: 'Diesel engines are expected to recover from a deep cyclical downturn in FY05, and building materials are rebounding nicely too. Xinfei (Chinese white goods) should benefit from organic growth and an increased stake from 51 per cent to 90 per cent.' Furthermore,'HLA trades at just 8.6 times our FY06 forecast, versus 13.6 times for the Singapore market and 12.1 times for Singapore mid-caps. Unlike its peers, HLA is projected to register a 36 per cent CAGR (compounded annual growth rate) for FY07-08E'.