Highlights

• HIL Industries Bhd’s (HIL) 3Q2019 net profit grew by more than seven-fold to RM8.7 mln, from RM1.1 mln in the last corresponding period, on the back of stronger revenue growth, which doubled to RM43.1 mln, from RM20.6 mln earlier, and improved bottomline margins.

• Subsequently, cumulative 9M2019 net profit rose 44.4% Y.o.Y to RM14.8 mln, from RM10.3 mln previously, following increased revenue at RM114.6 mln (+64.4% Y.o.Y), from RM69.7 mln last year, as well as stronger gross profit margins.

• HIL’s performance exceeded our expectations, making up about 82.1% and 89.4% of our previous estimated net profit and revenue forecast respectively, owing to stronger-than-expected topline growth. Moving forward, we increased our 2019 net profit and revenue forecast by 15.4% and 28.6% to RM20.9 mln and RM164.8 mln respectively, on the back of higher sales volume and stronger margins growth. Our 2020 earnings and turnover were also adjusted higher by 25.1% and 24.0% to RM25.8 mln and RM177.0 mln respectively.

• Segmentally, 9M2019 manufacturing EBIT was at RM2.4 mln, from an EBIT loss of RM1.0 mln previously, driven by higher demand for auto parts and greater efficiency. Property EBIT also grew to RM14.7 mln, from RM10.2 mln in 9M2018, mainly due to increased property sales billings

Prospects

Domestic car sales fell during 3Q2019, due to the absence of the tax holiday in 2018 and increased public holidays in 3Q2019. Even so, HIL appears to be shielded from the slowdown, cushioned by strong demand from a key local car manufacturer. Meanwhile, its property segment remains positive, following new project launches like Amverton Greens, Kemuning Hijauan 3 and Amverton Links (Phase I).

Moving forward, we expect earnings growth to be powered by progressive sales recognition from its ongoing housing projects, resilient demand for car parts from Perodua, improved floor utilisation and efficiency. However, we are also cautious of the lackluster consumer sentiment, increasing household debt, affordability issues and oversupply, which will continue to weigh on property sales, going forward.

Valuation and Recommendation

Even though HIL has outperformed our earlier forecast, we maintain our HOLD recommendation on HIL Industries Bhd, but with a higher target price of RM0.75 (from RM0.70) as we adopt a cautious approach to this stock owing to several unresolved headwinds in the domestic property landscape, i.e.: increasing unsold properties, strict lending requirements by financial institutions and rising costs.

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 - 25 Nov 2019