HIL’s 1QFY23 results disappointed, mainly dragged by its weak property segment, while the manufacturing segment continued to ride on recurring orders. We cut our FY23-24F earnings forecasts by 10% and 12%, respectively, reduce our TP by 3% to RM0.78 (from RM0.81) and maintain our UNDERPERFORM call.
Below expectations. 1QFY23 results disappointed, accounting for only 21% each of both our and consensus full-year estimates. We believe the variance against our forecast stemmed largely from weaker-than-expected property segment’s profit.
YoY. 1QFY23 revenue grew 8%, fuelled by the sustained growth in the manufacturing segment. Revenue from the plastics moulding division grew 22% largely from rising demand for new automobiles following both the fulfilment of orders made during the SST exemptions as well as Hari Raya promotional campaigns. The group commented that its backlog of orders currently ranges from two to six months depending on the customers. Conversely, revenue from its property segment fell 23% as limited launches coupled with rising interest rates resulted in more cautious sentiment with earnings falling 21%. Group’s core net profit rose 10% as the growth in plastics moulding offset the weaker property earnings.
QoQ. 1QFY23 revenue contracted 5.1% following a 40% drop in property revenue. Plastics moulding revenue grew 14% with earnings jumping 81% as the segment benefited from better economies of scale. Additionally, despite the drop in revenue, property earnings increased 52%. We believe this could be due to costs associated with the launch of the group’s townhouse project incurred in 4QFY22. Its net profit more than doubled as the group saw operating costs normalise significantly following the spike in the previous quarter.
Outlook. The outlook for the group continues to be mixed as global macroeconomic headwinds are signalling challenging times ahead. The group’s property segment continues to struggle as rising interest rates and construction cost resulted in slower sales of its developments. We believe sentiment surrounding the property market could be softer in the near-term as fears of recession may dampen consumer commitment to big ticket purchases such as properties. On a brighter note, the group’s manufacturing division continues to perform well as the automotive order backlog from FY22 has extended into FY23. However, looking beyond 2HFY23, earnings visibility is slightly cloudier. While the segment has been able to perform thus far, historical performance has shown that margins for the segment are thin when production volumes are low. Hence, should automotive orders fail to sustain into FY24, the group could see pressure on its margins.
Forecasts. We reduce our FY23-24F earnings forecasts by 10-12% to reflect weaker property earnings following the limited activity during 3QFY23.
We reduce our TP by 3% to RM0.78 (from RM0.81) as we roll over our SoP valuation to FY24F (see Page 3). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 5).
We are cautious on HIL given: (i) its limited earnings visibility for the manufacturing segment beyond 2023, and (ii) expected weak performance of its property launches this year given the soft market condition. Reiterate our UNDERPERFORM call.
Risks to our call include: (i) stronger-than-expected recovery in the demand for auto parts as supply-chain constraints ease, (ii) easing in input costs, and (iii) a strong recovery in the property market.
Source: Kenanga Research - 30 May 2023
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