Investment Highlights

• We maintain HOLD on Hup Seng Industries (HSI) with an FV of RM0.92/share based on an FY19 PE of 16x, three notches below its three-year average forward PE of 19x.

• 9MFY18 net profit of RM30.2mil was broadly in line with our expectation, meeting 70% of our FY projection but only 66% of consensus. Revenue grew 4% YoY while net profit rose 1% YoY. Sales from modern and wholesale channels improved 6% but exports declined 3% due to a stronger MYR.

• The group saw weaker margins at the gross level due to higher operating costs. Administrative and marketing expenses still made up about a fifth of its revenue, but we note that neither sales of biscuits nor beverages have improved significantly over many quarters.

• 3QFY18 saw net profit expand 6% YoY and this has compensated slightly for the exceptionally weak 2Q, which was its worst quarterly showing in at least three years. The overall YTD performance was flat.

• HSI guided that domestic sales continued to grow at a singledigit rate but exports also improved 8% YoY from better sales to Indonesia, Myanmar and Mauritius.

• The stronger 3Q sales made up for a small improvement in margins on a sequential basis. We reiterate that HSI may have lost the price leadership for its key products given that the biscuit manufacturing segment’s operating margin last stood at 13% compared to a peak of 25% three years ago.

• Its beverages segment could still be finding its place in the market and may still be optimizing its sales structure which relies on distributors. Margins here are still volatile but generally in a stronger range in the past four quarters than the prior years.

• Amid a massive challenge in containing costs and improving sales, the group will continue to improve efficiency, optimize its product portfolio and widen its distribution network.

• We believe HSI is heading into its third year of a net profit decline, but we have imputed a cautious 6% growth in FY19 premised on slightly better margins from better cost management.

• The group declared a second dividend, bringing up the tally to 4.0 sen/share and a payout of 106% of its EPS. The amount and quantum of payout are similar to the previous corresponding period. Yields are fairly attractive at above 4.0% but we reiterate that its generous dividend payouts have come at the expense of maintaining the status quo.

Source: AmInvest Research - 22 Nov 2018