Results Review

• HIL Industries Bhd (HIL) posted a sharp fall in its 1Q2019 net profit to RM1.5 mln (- 71.8% Y.o.Y), compared to RM5.4 mln in the previous corresponding quarter with the inclusion of a one-off gain from the acquisition of a subsidiary in 1Q2018. In contrast, revenue jumped 72.3% Y.o.Y to RM35.6 mln, from RM20.6 mln last year.

• The reported net profit came in significantly lower than our expectations, accounting to only 6.7% of our previous full-year net profit forecast of RM22.8 mln. On the brighter side, however, revenue was within expectations, coming in at about 27.7% of our forecast revenue of RM35.6 mln. Among others, the variance was mainly attributed to weaker-than-expected margins in the property segment.

• Consequently, we adopted a more cautious EBITDA margin assumption and tweaked our depreciation forecast slightly, resulting in a 20.8% drop in our 2019 net profit forecast to RM18.1 mln, while revenue was maintained at RM128.1 mln. We also introduce our 2020 forecast net profit and turnover of RM20.6 mln and RM142.7 mln respectively.

• Segmentally, 1Q2019 manufacturing EBIT loss narrowed to RM0.8 mln compared to RM1.1 mln previously, which could be attributed to healthy orders from Perodua. The property segment, however, posted an EBIT of RM2.3 mln (-58.6% Y.o.Y), from RM5.6 mln last year, mainly due to the one-off gain from the acquisition of A&M Concrete and Show Piece last year.

Prospects

Despite a slow start in 2019, we believe that the near-term outlook for HIL will improve over time, supported by steady orders from Perodua MYVI and progress billings from its affordable housing portfolio. Additionally, new orders for SUV Perodua Aruz are also expected to boost volumes and productivity.

The group is planning to launch Amverton Links Phase 2 (comprising of 84 units of 2- storey link houses) by end-2019. As the new project is located adjacent to the Amverton Links Phase 1, which was launched earlier and received good response, we are mostly positive on the potential sales of Amverton Links P2.

Barring any unforeseen circumstances (i.e.: supply-chain disruption in Perodua last year), we expect 2H2019 to outperform 1H2019, in-tandem with higher sales during the year-end festive holidays. Automakers like Perodua are expected to offer discounts and freebies ahead of the holidays and stock clearance activities, boosting orders for auto parts.

On the downside, China’s manufacturing arm remains depressed amid the ongoing trade war between the U.S. and China. Consequently, we believe that inflated costs and failing orders will be a difficult obstacle for HIL to overcome in the near-term and thus, foresee this unit to be a potential drag on HIL’s manufacturing earnings.

Valuation and Recommendation

Despite its more attractive valuations and potentially improved prospects in 2H2019, we maintain our HOLD recommendation on HIL Industries Bhd with an unchanged target price of RM0.70 amid our cautious stance on the property sector in Malaysia, inview of tighter loan financing requirements and lingering oversupply. Again, more evidence of a solid recovery is needed before we can justify an upgrade to HIL’s share recommendation.

Our target price is based on sum-of-parts (SOP) approach with an unchanged target PER of 9.0x to its 2019 manufacturing business and a discount of 50% (unchanged) to the revalued net asset value (RNAV) estimate of HIL’s property unit.

Source: Mplus Research - 24 May 2019