HSI’s 1Q18 core PAT of RM11.1m (-23.3% QoQ, -4.1% YoY) was within ours and consensus expectations. Slimmer gross profit margin in 1Q18 was mainly due to higher input costs. However, we expect this to be short-lived due to lower CPO price going forward. We maintain our BUY call and unchanged TP of RM1.38 based on 20x FY19 EPS of 6.9 sen.

In line. Reported 1Q18 core PAT of RM11.1m was broadly in line, accounting for 21.8% and 25.9% of ours and consensus expectations, respectively. We expect margins to improve going forward as a result of cheaper CPO price.

Dividend. None declared.

QoQ. Revenue slipped 10.5% to RM77.1m due to seasonally lesser sales in both domestic and export markets. Additionally, higher input costs resulted in lower core PAT (-23.0%) as gross profit margin slipped to 36.7% from 38%).

YoY. Revenue grew 4% to RM77.1m from RM73.9m driven by domestic sales growth (+6.0%) mainly from modern channel as well as marginal export sales growth (+1%). Core PAT dipped 4.1% to RM11.1m from RM11.6m due to similar reasons mentioned above.

Outlook: Rebounding consumer sentiment supported by the potential abolishment of GST in 2018 is expected to bode well for the group’s top line. Despite the slimmer gross profit margin in 1Q18, weaker CPO prices going forward should result in lower raw material cost. We estimate the CPO price in 2018 to average lower at RM2,500/mt vs the average price of RM2,715 in 2017. To date, the CPO price has averaged RM2,465/mt. Note that CPO and flour make up over 70% of the group’s raw material cost.

Forecast. Unchanged as the results were inline.

Maintain BUY. We like HSI for its strong dividend yield, healthy net cash position and expected margin expansion going forward. We maintain our BUY call and unchanged TP of RM1.38 based on 20x FY19 EPS of 6.9 sen.

Source: Hong Leong Investment Bank Research - 16 May 2018