• Overview. Hup Seng Industries (HSI) 3Q22 revenue improved by 8.3% YoY but declined 4.9% QoQ no thanks to the slowdown in sales from export market i.e., Thailand and Maldives. Domestic market also showed a less-than-favourable performance due to the decrease in wholesale channel and from East Malaysia. Following that, net profit also dropped or by 5.9% YoY dragged as well by higher cost of sales which jumped by 12.0% YoY.

• Key highlights. However, HSI’s bottom linesimproved by 26.5% QoQ, lifted by the decline in key commodities prices. This pushed the expansion in net profit margin by 1.4ppts to 5.5% in 2Q22.

• Against estimates: Below. 9M22 net profit of RM14mn came in below our forecast or accounting 62% of our full year projection.

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

• Outlook. Continuous headwinds could hamper HSI form and subsequently earnings including (i) higher cost of sales, (ii) inflationary risk and (iii) weak consumer sentiment.

• Revision. We cut our FY22F, FY23F and FY24F earnings forecast by 13.1%, 7.4% and 10.4% respectively after we incorporate lower sales assumption due to various challenges and headwinds as aforementioned.

• Our call. Maintain a HOLD call with a lower target price of RM0.67 (RM0.69 previously) following earnings cut. Our valuation is pegged at 27x PER to FY23F EPS of 2.5sen. The valuation is justified given challenging business outlook, elevated production costs and weak consumer sentiment following inflationary environment.

Source: BIMB Securities Research - 10 Nov 2022