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