• Overview. Hup Seng Industries (HSI) 2Q22 revenue improved by 11% YoY but declined by 6.9% QoQ no thanks to lower contribution from domestic and export markets. Following that, core net profit also dropped or by 15.1% YoY dragged as well by higher cost of sales which jumped by 19.0% YoY.

• Key highlights. All in all, HSI’sless-than-favourable earnings was hurt, among others, by an increase in raw material prices, including palm oil and wheat flour which cumulatively made up over 70% of raw material costs as well as weak consumer sentiment due to inflationary environment. This dented net margin which slipped by 1.2ppts to 4.1% in 2Q22.

• Against estimates: Inline. 1H22 net profit of RM9.8mn was in line with our forecast which accounted 45% of our full year estimates.

• Dividend. HSI declared a DPS of 1.0 sen during the quarter. As stated by the management, the entitlement date will be announced in near term.

• Outlook. 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 are cautious on its near-term outlook and will seek better clarity once the management grants our request for a meet up session.

• Our call. No adjustment to our forecast at this juncture and we maintain a HOLD call on HSI with a TP of 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 - 11 Aug 2022