Results Review

• HIL Industries Bhd’s (HIL) 2Q2018 net profit more than doubled to RM3.8 mln, from RM1.6 mln a year ago, due to higher sales orders from a key client and higher progress billings from its property segment. Revenue for the quarter also gained 26.5% Y.o.Y to RM28.5 mln, from RM22.5 mln in the same quarter last year.

• Cumulative 1H2018 net profit also jumped significantly to RM9.2 mln, compared to RM3.6 mln earlier, on the one-off acquisition gain in 1Q2018, as well as broad improvements across its business segments. Revenue, meanwhile, also rose 13.1% Y.o.Y to RM49.1 mln, from RM43.4 mln in 1H2017.

• 1H2018 net profit was ahead of expectations, accounting for 67.2% of our previous full-year estimates. Revenue, however, only accounted for 42.3% Y.o.Y of our forecast revenue. The variations were mainly due to better-than-expected performance from the property segment and the manufacturing division, which benefitted from the strong demand for Perodua’s new MYVI variation.

• Segmentally, the 1H2018 manufacturing segment EBIT loss narrowed to RM1.3 mln, compared to an EBIT loss of RM3.3 mln in 1H2017 on stronger turnover and higher utilisation rates. On the other hand, the property segment’s EBIT jumped to RM9.8 mln (+51.8% Y.o.Y), from RM6.4 mln in 1H2017, due to higher billings from newly launched projects.

Prospects

Moving forward, we remain positive on orders from Perodua, which accounts from nearly 90.0% of revenue contributed from the plastic component manufacturing segment, following the strong positive response for its new MYVI variation. As expected, July saw a spike in total volume industry (TIV) or the number of vehicles sold to record levels since December 2015, mainly due to the tax holiday period. Perodua continued to maintain significant market share (1H2018:40.4% vs 1H2017: 35.0%). On the downside, orders might slow slightly in the following quarters post-implementation of the SST in September.

We look forward to the finalisation of the National Automotive Policy (NAP) 2018 for a clearer picture of what is in store for automotive industry in the long-run. We note that the government is considering limiting foreign car imports, which could benefit local car manufacturers like Perodua and auto-parts maker like HIL and APM Automotive Bhd, although nothing is set in stone at the current juncture.

Earnings growth in the property segment, meanwhile, will be underpinned by progress billings from its recently launched projects, mainly Amverton Greens and Kemuning Greenhills 108 in Bukit Kemuning. HIL also plans to launch another project featuring 100 units of double storey link houses in 3Q2018.

Downside risks include deterioration in the turnover contribution from China following the ongoing trade riff between the U.S. and China. To recap, the group manufactures plastics injection molded products for IT-brands like DELL and Western Digital that has manufacturing facilities in China, which could potentially be hit by new tariffs slapped by the U.S. on China-made consumer electronics and in turn, impact the demand for HIL’s products. Sales from China contributed about 12.7% (or RM85.2 mln) of the total turnover last year.

Valuation And Recommendation

We lift our FY18-FY19 estimated earnings by 14%-30% to factor in higher manufacturing margins as well as slight adjustments to our depreciation and tax rate assumptions. However, we trimmed our FY18 and FY19 revenue forecasts by 6.8% and 11.0% respectively after adjusting sales volume more conservatively, in-view of the potential slowdown in orders after the SST kicks-off in September.

Following the earnings upgrade, we also upgrade our call on HIL to a BUY (from a Hold) with a higher target price of RM0.74 (from RM0.68), on the back of its stronger earnings prospects, underpinned by improved bottomline margins, increased production utilisation and robust demand for the new MYVI. Our target price is premised on a sumof-parts (SOP) approach, ascribing to an unchanged target PER of 9.0x to its 2018 manufacturing business and a discount of 50% to the revalued net asset value (RNAV) estimate of HIL’s property unit. 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 the 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 - 24 Aug 2018