Investment Highlights

• We maintain HOLD on Hup Seng Industries with an unchanged FV of RM1.05/share based on an FY18F PE of 17x. This is nearly on par with its three-year average forward PE of 17.8x.

• The third quarter set of results was unexciting as both top and bottomline earnings came in flat on a sequential basis. Margins in the past two quarters were the company's lowest in years, as CPO prices went up and marketing costs skyrocketed.

• 9MFY17 net profit of RM30mil met 65% of our projection. We maintain our numbers as earnings are usually lumpy in the fourth quarter, which generally account for 30% of the group's annual net profit. We expect the group's 4QFY17 earnings to be stronger than 3QFY17.

• For the YTD period, the group managed to post a revenue growth of 5% YoY. This was led by growth in export sales (up 11%) while domestic sales grew by a tepid 3%. Revenue growth of 5% for the YTD period was not a big leap from its 4-year (2012-2016) CAGR of 4%.

• Net profit dipped 12% YoY due to higher input costs. The market remains highly competitive as domestic sales have been slow despite the group’s increased spending on marketing (up 13% in YTD).

• The group has held back its introduction of new products as it is still finding ground from the most recent ones. It last launched the Naturell Oat Cookies and utilisation for this line was only at 25%.

• The group declared a dividend of 2 sen/share and paid out nearly all of its net profit. This is expected given the substantial net cash reserves and limited expansion plans for the near term. Dividend yields are still attractive at 4.7%.

• We reiterate that the growth story is uncompelling at this stage as the group works to fortify its domestic business and is holding back from making a genuine move into China.

Source: AmInvest Research - 16 Nov 2017