9M18 core PATAMI of RM30.2m (+0.5% YoY) was below ours and consensus expectations at 61.3% and 65.7% respectively. This was mainly due to higher than expected operating cost. We lower our FY18/19/20 forecasts by 8.7%/8.3%/ 9.3% to account for slimmer margins going forward from higher packaging cost. We like HSI for its favourable dividend yield, healthy net cash position and reasonable valuations. Post earnings adjustment, our TP falls from RM1.38 to RM1.28 from based on an unchanged 20x PE multiple of FY19 EPS of 6.3 sen. Our BUY call is maintained.

Below expectations. 9M18 core PATAMI of RM30.2m (+0.5% YoY) was below ours and consensus expectations at 61.3% and 65.7% respectively. This was mainly due to higher than expected operating cost.

Dividend. None Declared.

QoQ. Core PAT rose 17.9% to RM10.3m from RM8.8m. This was in tandem with better top line of RM74.6m (+7.0%) from better domestic and export sales, which was predominantly due to increased biscuit sales.

YoY. Top line grew 6.1% to RM74.6m, which was due to higher domestic (+5.0%) and export sales (+8.0%) (mainly from Indonesia, Myanmar and Mauritius). Note that export sales declined in 1Q & 2Q. Better sales resulted in core PAT growth of 9.3%.

YTD. Domestic sales increase of 6.0% more than compensated for export sales decline of 3.0% (which was due to stronger ringgit, particularly in 1H18), resulting in top line growth of 3.8%. Despite lower CPO cost (average spot price in 9M17: RM2,723 vs 9M18: RM2,367/MT), higher packaging cost resulted in slimmer margins and hence flattish core PATAMI of RM30.2m.

Forecasts: We lower our FY18/19/20 forecasts by 8.7%/8.3%/9.3% to account for slimmer margins going forward from higher packaging cost.

Outlook: While we do not rule out the possibility of a price increase, we understand that Hup Seng has not yet increased selling prices from the onset of the SST regime. The recent purchase of a new oven is expected to reduce wastage and boost profitability, despite this, we expect the new oven to only be operational at end FY19.

Maintain BUY. We like HSI for its favourable dividend yield, healthy net cash position and reasonable valuations. Post earnings adjustment, our TP falls from RM1.38 to

RM1.28 from based on an unchanged 20x PE multiple of FY19 EPS of 6.3 sen. Our BUY call Is Maintained.

Source: Hong Leong Investment Bank Research - 22 Nov 2018