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.

• FY19 core net profit of RM42.2mil narrowly missed expectations, meeting 97% of our FY estimate and 95% of consensus. The FY result was HSI’s fourth consecutive drop in annual net profit.

• Core net profit fell 3% YoY in FY19 despite revenue improving by the same quantum. The higher revenue was attributable to better sales on both domestic and overseas fronts, but the impact of the latter was muted by the weakness in the ringgit.

• The deterioration was visible from the gross level, where margins fell 2ppts on a YoY basis on higher operating costs. Apart from this, the group’s administrative and marketing costs as a portion of revenue improved slightly (by 1ppt) to 18% of revenue in FY19.

• Margins were wobbly throughout the year and generally below the previous year’s, as the group still had to devote a substantial amount to incentives and promotional costs.

• The usual boon seen by HSI in the final quarter was constrained by the impact of the weaker ringgit on exports and high marketing costs. Core net profit in 4Q was 9% lower YoY on the back of a flat revenue.

• We believe the single-digit growth in domestic sales especially is a welcome change, but the group still struggles to reap the benefit from this amid high operating costs and marketing expenses.

• We retain a cautious single-digit growth in FY19 premised on slightly better margins from better cost management, expansion of its products and distribution network.

• We highlight the key positives from the FY19 results:

o 1) The group announced total dividends of 6 sen/share in FY19, the same amount from the previous year. 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.;

o 2) HSI maintained a substantial net cash position of RM96.3mil, as its capex cost remained minor at RM4.2mil last year. Recall that the group held off from expanding its production facilities indefinitely as it waits for the numbers from several products to improve.

Source: AmInvest Research - 20 Feb 2019