Results Review

• We maintain our BUY recommendation on HIL Industries Bhd (HIL), but with a lower target price of RM0.70 (from RM0.74), after rolling forward our valuation metrics to 2019 (from 2018). Despite cutting our 2018-2019 net profit forecasts, we believe that HIL is poised to post improvements as its key customer recovers from previous production disruptions and the recognition from its newly launched property project.

• HIL registered a significant 82.4% Y.o.Y drop in its 3Q2018 net profit to a mere RM1.1 mln, from RM6.4 mln in the previous corresponding period, largely due to lower property sales and production disruption by one of HIL’s major customer. Similarly, revenue was down by 30.0% Y.o.Y to RM20.6 mln, from RM29.5 mln previously.

• 9M2018 net profit, however, inched slightly higher to RM10.3 mln (+3.1% Y.o.Y), compared to RM10.0 mln earlier, mainly due to higher other income that was boosted by the one-off acquisition gain in 1Q2018 and lower tax charges. Meanwhile, cumulative 9M2018 revenue narrowed 4.3% Y.o.Y to RM69.7 mln, from RM72.9 mln last year.

• HIL’s 9M2018 net profit underperformed our projections, accounting for only 57.7% of our previous full-year forecast, while revenue was only 64.4% of our estimated revenue. The shortfall was mainly driven by significantly lower contribution from the manufacturing segment, which we believe was weighed down by supply issues experienced by Perodua in August.

Prospects

We believe the lower manufacturing sales could have resulted from supply-chain disruptions at Perodua, which saw delayed deliveries of the newly-launched Myvi to some 3,000 customers. However, we think that the setback is likely to be temporary and orders for auto-parts will improve in the final quarter, in-tandem with the resumption in production at Perodua and aggressive year-end promotions. On another note, we also saw improvements in the group’s Chinese subsidiary which could be tied to stronger demand for its IT product-related plastic parts ahead of the holiday shopping spree.

Meanwhile, revenue recognition from the property segment is expected to take some time before achieving a reasonable take-up rate, mainly due to the soft property market sentiment and tight lending requirements. The group has also launched a project involving 100 units of double-storey link houses in its Amverton Links development. We are positive on this development as the project is adjacent to its previous terrace house project which was sold out.

Meanwhile, risk includes the negative impact from the ongoing China-U.S. trade war on the demand for HIL’s products, rising dependency on its key customer Perodua and rising costs, while upside catalysts could stem from clearer automotive policies, lower raw materials prices and higher-than-expected project take-up rates.

Valuation And Recommendation

We slashed our forecast 2018 and 2019 net profit to RM14.1 mln (-20.0%) and RM17.7 mln (-36.8%) respectively, after accounting for the significantly weaker-than-expected third quarter results and lower property sales, in-view of the lackluster property market sentiment. Revenue was also adjusted lower by approximately 8.0% from 2018 to 2019. Our target price is premised on a sum-of-parts (SOP) approach, ascribing to an unchanged target PER of 9.0x to its 2019 (previously 2018) manufacturing business and a discount of 50% (unchanged) 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 - 23 Nov 2018