Results Review

• HIL’s 3Q2017 net profit jumped 41.7% Y.o.Y to RM6.4 mln, from RM4.5 mln in the previous corresponding period, on the back of higher profit recognition from its residential project following the completion of Quadz@Kemuning Greenhills. Quarterly revenue grew 21.8% Y.o.Y to RM29.5 mln, from RM24.2 mln in 3Q2016.

• Cumulative 9M2017 net profit, meanwhile, gained marginally by 3.4% Y.o.Y to RM10.0 mln, from RM9.6 mln previously – owing to higher interest income and improved performance from its property unit.

• The results were above our expectations as its net profit exceeded our full-year forecast of RM9.6 mln by RM0.3 mln (or 3.5%), while revenue came in at 77.7% of our estimated revenue of RM93.8 mln. The variance was mainly due to higher EBITDA margin achieved at 23.2% vs. our forecast EBITDA of 20.8% and higherthan-expected interest income.

• YTD, the manufacturing segment posted a loss of RM4.3 mln, mainly on weak local sales due to the fall in total industry volume (TIV) in the automotive sector and forex losses – offsetting the improved topline performance of its China operations. The property division, meanwhile reported an 8.6% Y.o.Y growth in EBIT to RM14.9 mln on higher profit recognition of its property project, albeit slightly offset by lower revenue (-13.7% Y.o.Y).

• HIL has minimal borrowings, with a cash war chest of RM153.1 mln as of 9M2017. The group has a fixed dividend payout policy of 25.0% of its net profit, which translates to around 1.2% dividend yield.

Prospects

For the remaining quarter, we expect the positive earnings to continue as HIL recognises the sales from Quadz@Kemuning Greenhills and improvements in its domestic manufacturing division on stronger revenue from Perodua – a key automotive client.

Perodua’s newly launched third-generation Perodua Myvi has received encouraging demand from the public, securing about 5,000 pre-launch bookings. Consequently, the group expects stronger sales in 4Q2017 and is expected to produce about 75,000 to 80,000 units of the new model in a year. The aforementioned development could potentially boost HIL’s revenue as the latter is the supplier of several parts and components to Perodua for the new Myvi. We think that the TIV for vehicle sales will recover from the tepid sales in September in the final quarter of 2017, lifted by aggressive promotional offerings and stronger seasonal demand. (See Appendix 1)

Further, HIL’s overseas subsidiary is also expected to improve following the mass production of new orders, although we do not foresee a turnaround over the near term for its China operations this year owing to the still underutilised capacity.

The positive sales momentum, which is expected to spill over to the next year, will drive revenue growth in 2018, although net profit could see a slight decline in-tandem with weaker margins following the completion of HIL’s residential property – Quadz@Kemuning Greenhills. To overcome the falling revenue of the property segment, the group is ready to launch Kemuning Hijauan III (the final phase of its double-storey terraced properties), although there will be little impact to HIL’s bottomline in the nearterm due to the lower progress billings in the initial stage of development.

Valuation And Recommendation

Following the better-than-expected quarterly results, we increase our 2017 net profit and revenue forecast to RM13.2 mln (from RM9.6 mln, +37.3%) and RM99.2 mln (from RM93.8 mln, +5.8%), on potentially higher property sales and margins which boosted the group overall earnings outlook. Minor adjustments were also made to lower its depreciation charges and increases in its net interest.

Meanwhile, our 2018 estimated net profit was revised downwards, in-view of lower property sales, following the completion of Quadz@Kemuning Greenhills and weaker margins from the manufacturing segment. Revenue, however, is expected to improved, lifted by additional sales from a key automotive client and its overseas subsidiary.

Despite the revised earnings forecast, we maintain our HOLD recommendation on HIL with a lower target price of RM0.90 (from RM0.95), after rolling over our valuations to our 2018’s EPS of 3.6 sen. Our target price is premised on a sum-of-parts (SOP) approach, ascribing to a target PER of 11.0x (unchanged) to its manufacturing business and a 35% discount (from 25% previously) to our revalued net asset value (RNAV) estimate of HIL’s property unit, in view of challenging outlook for the property market in 2018). The target PER is similar to other small-to-mid cap peers and is trading at a slight discount to its closest competitor, APM Automotive Holdings as the latter’s market capitalisation is larger.

Downside risks to our recommendation include unexpected volatility in raw material prices, labour shortages, weak consumer sentiment which could deter big-ticket spending and tighter financing regulations.

Source: Mplus Research - 23 Nov 2017