Results Review

• HIL’s 4Q2017 net profit tanked 47.7% Y.o.Y to RM3.5 mln, from RM6.7 mln in the same quarter last year, dragged down by thinner gross margins and higher operational expenses, although the downside was offset by higher deferred tax asset. Revenue, however, gained 6.8% Y.o.Y to RM29.3 mln vs. RM27.5 mln in 4Q2016. The group has also proposed a first and final single-tier dividend of 1.75 sen per share, which will be payable at a date to be announced later.

• Full year net profit for 2017 also fell by 17.7% Y.o.Y to RM13.5 mln, from RM16.4 mln a year ago, on the back of forex losses amounting to RM1.9 mln compared to a forex gain of RM1.1 mln in 2016. Meanwhile, revenue rose 5.0% Y.o.Y to RM102.2 mln, from RM97.3 mln last year.

• The reported earnings were within our forecast as its net profit accounted to 102.1% of our full-year forecast of RM13.2 mln, while revenue reached 103.0% of our estimated revenue of RM99.2 mln.

• Segmentally, the manufacturing segment posted a wider EBIT loss of RM4.1 mln (from an estimated RM0.5 mln), weighed down by forex losses due to the stronger Ringgit. On the same note, the property division’s earnings also declined to RM14.5 mln (-23.9% Y.o.Y), from an EBIT of RM19.1 mln in 2016 – due to lower profit contribution from the Quadz @Kemuning Greenhills project which was completed last year.

• HIL continued to accumulate significant cash holdings amounting to RM156.3 mln, giving it room to expand when necessary.

Prospects

Moving forward, we foresee a stronger horizon for HIL, underpinned by a potential turnaround in the bottomline of its manufacturing arm on the back of higher orders from Perodua and the gradual recovery in its Chinese operations.

While we concur that the prevailing outlook in the automotive industry remains challenging amid the cautious consumer spending and rising inflation, the new models launches by automakers should spur selective buying optimism. Furthermore, Perodua – a key client of HIL, has also earmarked more than RM5.0 bln to purchase components and parts from its local vendors which could potentially benefit HIL.

In the near-term, however, we think that local sales will slow in 1Q2018 due to the cyclical nature of the automotive industry as the majority of the automobile purchases were concluded in December last year, in-tandem with year-end sales promotion and offers. The shorter working month in February will also contribute to lower sales orders in 1Q2018.

Meanwhile, HIL is on track to launch Kemuning Hijauan III - the final phase of its doublestorey terraced properties and two other potential property projects in 2018, following the completion of the acquisition of A&M Concrete and Show Piece in January 2018. However, we forecast weaker contribution from the property segment this year due to low revenue recognition as the projects could still be at the initial stages of construction.

Valuation And Recommendation

We lift our FY18 net profit higher to RM14.1 mln (+16.8%) as we pencil in higher margins from the manufacturing division, although we lowered our revenue forecast to RM117.5 mln (-0.7%) to account for lower utilisation rate amid the still difficult operating environment for automakers, despite potentially higher orders from Perodua that will cushion some of the reduced orders from other carmakers. We also introduce our 2019 forecast net profit and revenue at RM17.0 mln and RM126.2 mln respectively.

Consequently, we upgrade our recommendation on HIL to BUY (from Hold) and a higher target price of RM0.92 (from RM0.90). Our target price is premised on a sum-of-parts (SOP) approach, ascribing to an unchanged target PER of 11.0x to its manufacturing business and a discount of 25% to our revalued net asset value (RNAV) estimate of HIL’s property unit. We upgrade our recommendation on HIL after its recent share price weakness has made its valuations more attractive that is backed by its potentially improved earnings performance going forward.

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 due to the latter’s larger market capitalisation.

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 that could affect both automobile and property sales.

Source: Mplus Research - 1 Mar 2018