• We recently met with a key person from Hup Seng Industries Berhad (Hup Seng) for a management meeting. Following the meeting, we remain cautious on its outlook considering the headwinds and challenges facing the company.

• Downside risks to earnings could hurt Hup Seng’s bottom line including (i) higher cost of sales, (ii) inflationary risk and (iii) weak consumer sentiment.

• Maintain Hup Seng as a HOLD with unchanged TP of RM0.69 – which is based on 25.5x PER that is pegged to FY23F EPS of 2.7sen.

The key takeaways:

• Rising input cost is a bane for Hup Seng including flour, CPO and crude oil no thanks to unfavourable external condition including the global supply chain disruption. This was also added by various factors that are beyond Hup Seng’s control (e.g., inflationary pressure, labour shortages, COVID-19 lockdown in China, Russia-Ukraine conflict), key risks to raw material costs, and hence, its bottom line in the near term.
• Management shared that it did not do any hedging strategy to mitigate the increase in raw material costs, but rather adjusting its pricing strategies and/or re-sizing major products when needed.

• Note that its domestic market, that accounts for over 70% of total sales, are split into four segments (i) wholesalers, (ii) retailers, (iii) hypermarkets, and (iv) supermarkets. According to the management, wholesalers and retailers make up a larger share due to their higher take-up rate than hypermarkets and supermarkets.

• Rising cost is a concern as it can lead to a decline in margin as seen in the 1H22 results where net margin dropped by 2.6 ppts YoY to 6.4%. We nonetheless forecast Hup Seng to achieve a PAT of RM21.5mn/RM21.2mn in FY23F/FY24F on the back of positive contribution from normalization in demand, and improved in productssales. On the same beat, margin is expected to remain stable as management will continue to address and monitor its costs structure despite costs pressure from the volatility in commodity prices.

• However, 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.

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

Maintain a HOLD recommendation and TP of RM0.69 on Hup Seng. 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 HOLD call is justified given challenging business outlook, elevated production costs and weak consumer sentiment following inflationary environment.

Source: BIMB Securities Research - 5 Oct 2022