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Intelligent Research report

Author: intelligenttrade   |   Latest post: Wed, 27 May 2020, 5:27 PM

 

Hup Seng Industries - Domestic Sales Stutters Again

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3Q19 core PAT of RM10.1m (QoQ: +12.5%, YoY: -2.5%) brought 9M19 core PAT to RM29.2m (YoY: -3.5%). This is below ours and consensus expectations, accounting for just 67.3% and 68.9% of forecasts, respectively. The results shortfall was mainly attributed to lower-than-expected domestic sales. We reduce our FY19/20/21 forecasts by 8.1%/8.5%/7.2% to account for weaker domestic sales going forward. After accounting for our earnings adjustment, our TP falls from RM1.03 to RM0.93 pegged to an unchanged 18x FY20 EPS. After our TP adjustment, we downgrade our call from Buy to HOLD.

Below expectations. 3Q19 core PAT of RM10.1m (QoQ: +12.5%, YoY: -2.5%) brought 9M19 core PAT to RM29.2m (YoY: -3.5%). This is below ours and consensus expectations, accounting for just 67.3% and 68.9% of forecasts, respectively. The results shortfall was mainly attributed to lower-than-expected domestic sales.

Dividend. Proposed dividend of 2 sen (3Q18: 2 sen) per share. 9M19 amounted to 4 sen (9M18: 4 sen) per share.

QoQ. Top line grew 10.0% driven by increased biscuit sales (+11.6%) in both domestic and export markets. Better sales in the domestic market were due to low base effect as Puasa month occurred in 2Q19. Core PAT grew 12.5% in tandem with sales growth.

YoY. Sales growth of 2.7% was mainly led by robust export sales (+8.0%) particularly to Saudi Arabia and China markets. Meanwhile, domestic sales registered marginal growth of 0.6%. However, poorer cost management led to core PAT registering 2.5% decline to RM10.1m.

YTD. Marginal domestic sales growth (+0.6%) mainly from wholesale channel to East Malaysia was partly offset by 1.3% decline in export market sales, particularly to Indonesia and Thailand. Overall, this had resulted in overall flat top line (+0.1%). However, poorer cost management resulted in bottom line decreasing 3.5%.

Forecasts: We reduce our FY19/20/21 forecasts by 8.1%/8.5%/7.2% to account for weaker domestic sales going forward.

Outlook: Despite lower average CPO price (9M19: RM2,127/MT vs 9M18: RM2,366/MT), Hup Seng has surprisingly not been able to record better gross profit margin (CPO makes up approximately 40% of the group’s raw material cost). Additionally, weak domestic sales remains a big worry for the group (domestic sales made up 71.8% of total sales in FY18). Despite our forecasted EPS of 5.0 sen in FY19, we do not expect HSI to cut its dividend amount of 6 sen per annum. Note that HSI had paid out 6 sen per share in DPS in FY17 and FY18 which represented 107% and 111% payout ratio of full year earnings, respectively. We do not doubt the group’s ability to pay out 6 sen per share for the foreseeable future given its net cash position of RM86.6m (RM0.11 per share) as of end-Sep 2019, coupled with strong cash flow generation from its operations.

Downgrade to HOLD, TP: RM0.93. After accounting for our earnings adjustment, our TP falls from RM1.03 to RM0.93 pegged to an unchanged 18x FY20 EPS. While we like HSI for its favourable dividend yield (6.6%), healthy net cash position (RM0.11 per share) and reasonable valuations vs larger cap consumer peers, we expect tepid domestic sales to stymie near term profitability. After our TP adjustment, we downgrade our call from Buy to a HOLD.

 

Source: Hong Leong Investment Bank Research - 26 Nov 2019

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