HSI’s 1Q23 net profit of RM9.7mn was in line with ours and consensus expectation, accounting 35.2% and 30.1% of full-year estimates respectively. This is due to the seasonal factor that came into effect in  1Q as we have been observing the same trend for the past 3 years. Net profit rose promisingly or by 42.7% driven by higher revenue and improving EBITDA margin to 16.4% (+3 ppts YoY), and lower net opex  (+5.2% YoY). Maintain a BUY recommendation with a TP of RM0.86.  Our valuation is pegged at 25x PER to FY23F EPS of 3.4sen.

• Within expectations. 1Q23 net profit of RM9.7mn (QoQ: -22.3%, YoY:  +42.7%) was in line with ours and consensus expectations accounting  35.2% and 30.1% of full year forecast respectively. This is due to the seasonal factor that came into effect in 1Q, a trend that was similar since  the past 3 years.

• Dividend. No dividend was declared in 1QFY23, consistent with the practice of previous years.

• QoQ. HSI's 1QFY23 revenue and net profit dropped by 9% and 22.3%  respectively due to seasonal factor in the domestic market,  compounded by sluggish demand. Additionally, export market which includes Myanmar, Saudi Arabia, Indonesia, and Vietnam, also decreased or by 25%. This shaved net margin by 1.9 ppts QoQ.

• YoY/ YTD. Revenue increased by 9% YoY, driven by domestic market which expanded by 15% powered by improvement across all channels.  Note that domestic market accounts for over 70% of revenue (2021:76.6%, 2022: 77.5%), which are split into four segments, namely i)  wholesalers, ii) retailers, iii) hypermarkets, and iv) supermarkets. Net profit rose promisingly or by 42.7% driven by higher revenue and improved EBITDA margin to 16.4% (+3 ppts YoY), and lower net opex  (+5.2% YoY).

• Outlook. HSI outlook will be driven by an expected decline in commodity price changes and various macro conditions. We anticipate HSI EBITDA  and net profit margin to improve by 1.0 ppts and 0.3 ppts YoY in FY23F,  respectively, to be propelled by i) improving consumer sentiment, ii)  higher sales volume, and iii) a decline in the prices of key commodities  (YTD performance – CPO:-12%, wheat: -22%), and hence, margin expansion. However, downside risk to earnings may however come from  1) protracted global supply chain disruption, 2) inflation conditions as a  rapid rise in the prices of goods and services will hurt demand.

• 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 - 19 May 2023