HSI’s 6M18 PAT of RM19.9m (-3.5% YoY) was below ours and consensus expectations mainly due to poorer than expected export sales as a result of stronger ringgit. FY18 forecasts are reduced by 3.1%. We maintain our BUY call and unchanged TP of RM1.38 based on 20x FY19 EPS of 6.9 sen.

Below expectations. Reported 6M18 core PAT of RM19.9m was below ours and consensus expectations, at 39.1% and 41.2% respectively. The poorer than expected performance was mainly due to lesser export sales.

Dividend. None Declared.

QoQ. PAT declined by 24.2% from RM11.1m to RM8.8m from lower sales mainly due to seasonality.

YoY. Domestic sales growth of +8.0% resulted from modern and wholesale channel performance. However, disappointing export sales (-16.0%) resulted from slower sales to Indonesia, Mauritius and Myanmar, from stronger ringgit vs SPLY. Lower PAT of 2.7% was a result of slightly higher operating costs.

YTD. Domestic sales growth (+7.0%) more than offset lesser export sales (-8.0%), resulting in marginal top line growth of 2.6%. PAT decreased by 3.5% to RM19.9 from RM20.6m due to higher operating cost.

Forecasts: We lower our FY18 forecasts by 3.1% to account for lower export sales.

Outlook: Despite the disappointing 2Q18 results, we are optimistic on HSI’s prospects going forward. Rebounding consumer sentiment and sales tax holiday between June and September should fuel top line growth. Despite the slimmer gross profit margin in 1H18, 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 RM2,393/mt. Note that CPO and flour make up over 70% of the group’s raw material cost.

Maintain BUY. We like HSI for its superb 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 Aug 2018