•   We anticipate a better year for the group, supported by several factors, including i) improving consumer sentiment, ii) higher sales volume, and iii) a decrease in the prices of key commodities and hence, margin expansion.

•   Maintain Hup Seng as a BUY with unchanged TP of RM0.86, based on 25x PER that is pegged to FY23F EPS of 3.4sen.

• 2022 Results Recap. To recap, Hup Seng Industries (HSI) FY22 revenue expanded by 7.6% YoY to RM318mn thanks to the increase in domestic market sales (+9%) and export market (+4%) particularly from countries like Saudi Arabia, Maldives and Indonesia. PAT declined however or by 12% YoY contributed partly to escalating core commodities prices in 2022 namely CPO and wheat as well as stiff market competition.

• Fluctuation in Input Cost a Concern. Rising input cost especially flour, CPO and crude oil was a bane for HSI in FY22, no thanks to unfavorable external conditions and prevailing global supply chain disruptions. This was further compounded by various factors that were beyond HSI’s control (e.g., inflationary pressure, labour shortages, COVID-19 lockdown measures locally and globally, and protracted Russia-Ukraine conflict). However, we expect prices for key commodities to pullback and normalize this year, which would result in the group’s net margin to improve. Note that, prices for CPO and wheat have pulled back convincingly YTD (CPO: -12%; wheat: -22%).

• Outlook. We project HSI revenue and PBT to increase by 1.9% YoY to RM324mn and 4.5% YoY to RM37.6mn in 2023 respectively. To recap, HSI experienced a significant surge in revenue and PBT in 4Q22, with growth of 16% and 26.6% QoQ respectively. We expect the group to continue with this positive trend, achieving similar or even better growth in line with our expectations, to be driven by higher sales volume primarily in the domestic market, which accounts for over 70% of total sales. Additionally, the normalization of raw material prices will also contribute to the company's growth. Downside risk to earnings may however come from 1) protracted global supply chain disruption 2) inflation condition as a rapid rise in the prices of goods and services will hurt demand.

• Dividend. The group adopts a dividend policy which aims to distribute at least 60% of the group’s net profit, and as such we project HSI to declare a base dividend of 2.1 sen dividend per share for 2023F/2024F, respectively. This translates into a 2.8% yield at current market price.

• Our Call. Maintain a BUY recommendation with a TP of RM0.86. Our valuation is pegged at 25x PER to FY23F EPS of 3.4sen. This is justified given improving consumer sentiment and by extension higher sales volume. This will also be driven by an expected decline in raw materials prices.

Source: BIMB Securities Research - 14 May 2023