Results Review

• HIL’s 1Q2018 net profit more than doubled to RM5.4 mln, boosted by a one-off gain following the completion of the acquisition of a new subsidiary. Revenue, however, fell marginally by 1.4% Y.o.Y to RM20.6 mln, from RM20.9 mln in 1Q2017.

• 1Q2018 net profit and revenue accounted for 39.6% and 17.8% of our previous fullyear forecast. The reported earnings deviated from our expectations with the oneoff gain from the acquisition of a subsidiary shoring up the earnings, while revenue was below expectations owing to lower progress billing from HIL’s property segment. Excluding the one-off gain, the normalised profit is significantly lower at just RM78,000, dragged down by the significant loss of its Chinese unit due to unfavorable product mix.

• Segmentally, the manufacturing segment EBIT loss widened marginally to RM1.1 mln, compared to an EBIT loss of RM1.0 mln in 1Q2018, weighed down by the unfavorable product mix. On the other hand, the property segment EBIT jumped to RM5.6 mln (+107.4%) due to the gain from the acquisition of subsidiaries.

• HIL’s war chest continued to swell with significant cash holdings amounting to RM133.0 mln, which will enable the group capitalised on investment opportunities, should any arise.

• We expect the group to pay about 1.4 sen per share dividend (based on average dividend payout of 34.3% of net profit) this financial year, which will translate into a 1.7% dividend yield.

Prospects

Despite the strong reported net profit, we note that the profitability will not be sustainable in the coming quarters as it was lifted by a one-off gain following the acquisition of A&M Concrete Products, Show Piece and Innocentral. Weaker-than expected topline is also a possibility due to the prevailing weakness in HIL’s manufacturing segment as the group continues to struggle with low utilisation rate and thin margins, particularly in its overseas subsidiaries. Meanwhile, property sales were also slower in the current quarter, owing to delayed project launches. We reckoned sales were also impacted by a wait-and-see approach, whereby buyers delayed property purchases prior to the GE14 election.

Moving forward, we foresee a short-term advantage for the automotive industry which is set to benefit from the government’s goal to scrap the goods and services tax (GST). A spike in auto sales is expected as consumers rush to purchase lower-priced cars with the GST rebates and Hari Raya incentives.

On that note, Perusahaan Otomobil Kedua Sdn Bhd (Perodua) is also offering GST cash rebates ranging from RM1,000 and RM3,800 to customers for new vehicle or auto parts purchases, as well as servicing. We think that the promotion is likely to be well-received given Perodua’s solid leadership in the auto industry, which could lead to potentially higher orders for HIL.

On the flipside, however, many industry players have indicated potentially higher vehicle prices with the re-introduction of SST that could potentially dampened sales after the dust has settled.

Its property division, meanwhile, is projected to be slow this year due to slower recognition as newly launched projects are unlikely to provide meaningful earnings contribution. We are cautiously optimistic that the GST removal will spur buyers’ sentiments in the property market, resulting in a short-term boon for HIL’s property sales, although any significant upside is likely to be capped by strict lending requirements, affordability issues and further clarifications on government policies.

Valuation And Recommendation

Despite the soft results, we keep our earnings forecast unchanged for now, pending further information from the company. However, we downgrade our call on HIL to a HOLD (from a Buy) with a lower target price of RM0.77 (from RM0.92). Our target price is premised on a sum-of-parts (SOP) approach, ascribing to a lower target PER of 9.0x (from 11.0x) to its manufacturing business and a discount of 40% (from 25%) to the revalued net asset value (RNAV) estimate of HIL’s property unit. The revision was mainly due to persistently low manufacturing utilisation rate and depressed property market.

The target PER is similar to other small-to-mid cap peers and is 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 - 25 May 2018