• Overview. Hup Seng Industries (HSI) 4Q22 revenue surged by 16% YoY and 35.2% QoQ thanks to the increase in domestic market from all channels which expanded by 23% YoY and 36% QoQ, respectively. PAT also jumped or by 28.1% YoY and 223.6% QoQ on account of higher sales and lower raw material prices.

• Key highlights. HSI’s bottom lines improved by 223.6% QoQ, lifted particularly by the decline in key commodities prices. This pushed the expansion in net profit margin by 7.6ppts to 13.1%.

• Against estimates: Above. 12M22 net profit of RM26mn came in above our forecast or accounting 136.4% of our full year projection.

• Dividend. HSI declared a 1.0 sen DPS for the quarter. The entitlement date will be announced in near term.

• Outlook. Upside risks to earnings may come from stronger-than-expected demand, cost normalisation as major commodity prices have started to ease, and an improvement in consumer sentiment, which may lead to better sales volume.

• Revision. We increase our FY23F, and FY24F earnings forecast by 37.6%, and 49.5% respectively after incorporating higher sales assumption following improvement in consumer sentiment. This will also be pushed by the pullback in commodity prices and hence, the group’s net margin.

• Our call. Following our earnings revision, we upgrade our call to a BUY from a Hold with a new target price of RM0.86. Our valuation is pegged at 25x PER to FY23F EPS of 3.4sen. Our FV is justified given improving consumer sentiment and by extension higher sales volume. This will also be driven by a decline in raw materials prices.

Source: BIMB Securities Research - 15 Feb 2023