• Various headwinds could hurt Hup Seng’s earnings in the near term including (i) higher cost of sales, (ii) inflationary risk and (iii) weak consumer sentiment.

• We initiate coverage on Hup Seng Industries with a HOLD call and TP of RM0.69 pegged at 25.5x PER to FY23F EPS of 2.7sen.

A well-known and iconic brand in Malaysia’s cracker market

Since its establishment in 1991, Hup Seng Industries (HSI) has developed a strong brand identity and amassed the largest market share in the cracker industry. Given its 60 years history of manufacturing and selling crackers (Hup Seng), biscuits (Cap Ping Pong), oat cookies (Naturell), and beverage mixes (In-Comix), we believe HSI will remain as one of the key brands highly sought after by consumers.

Global commodities headwinds jeopardize the earnings

Production costs may remain elevated throughout 2022 and probably into 2023 owing to supply and demand imbalances, disruptions in global supply chain, and labour shortage issue. Consequently, we foresee volatility in the group's core commodity prices and therefore, cost of sales where this will have a direct impact on bottom line.

Consumer sentiment to remain sluggish

Given the current inflationary environment and the expectation that it will remain elevated in the near term, we believe this factor will have a direct effect on consumer sentiment and by extension, consumer purchasing power.

Commitment up to 60% dividend payout

The management is committed to reward up to 60% of net profit as dividend to its shareholders. Assuming a 60% dividend payout ratio, we expect Hup Seng to declare 1.7 sen/ 1.6 sen/ 1.6 sen dividend per share for 2022F/ 2023F/ 2024F respectively, translating into a 2.1% - 2.2% yield at current market price.

Initiate with a ‘HOLD’ call and TP of RM0.69 a piece

We initiate coverage on HSI with a HOLD recommendation and TP RM0.69. Our TP is based on a slight discount to 5-year average historical PER or 25.5x, that is pegged to FY23F EPS of 2.7sen. The valuation is justified given challenging business outlook, elevated production costs and weak consumer sentiment following inflationary environment.

Source: BIMB Securities Research - 8 Aug 2022