1Q19 core PAT of RM10.1m (-9.1% YoY) was below ours and consensus expectations, accounting for just 20.1% and 21.6% of forecasts, respectively. The poorer-than-expected performance was mainly attributed to lower-than expected export sales. We reduce our FY19/20 forecasts by 1.7% and 3.8%. We like HSI for its favourable dividend yield (5.7%), healthy net cash position and reasonable valuations. Despite this, concerns over the brand’s core product in export markets linger. We reduce our PE multiple from 20x to 18x to reflect the riskier sales outlook for the group in export markets. After our earnings and PE adjustments, our TP is lowered to RM1.12 from RM1.28. Our BUY call is unchanged.

Below expectations. 1Q19 core PAT of RM10.1m (-9.1% YoY) was below ours and consensus expectations, accounting for just 20.1% and 21.6% of forecasts, respectively. The poorer-than-expected performance was mainly attributed to lower than-expected export sales.

Dividend. None Declared. (1Q18: None)

QoQ. Significant decline in sales revenue (-12.2%) was due to poorer domestic and export sales, specifically to Saudi Arabia, Indonesia, Vietnam, Mauritius and Thailand. Note that seasonality also influenced top line, as 4Q is typically the strongest quarter, accounting for 28-30% of full year sales. Lower sales translated to reduced PAT of RM10.1m (-20.7%).

YoY. Sales revenue declined 2.3% to RM75.4m from RM77.1m. The decline was mainly attributed to weaker export sales of approximately 15.0% to countries mentioned above. Despite this, domestic sales grew 3.0% mainly to wholesales channels and East Malaysia. Core PAT dipped by 9.1% from higher raw material cost.

Forecasts: We reduce our FY19/20 forecasts by 1.7% and 3.8%, and introduce FY21 forecast PAT of RM 51.8m (+2.4% YoY).

Outlook: We expect Hup Seng Industries to benefit from relatively low CPO price in FY19 (HLIB expects the price of CPO to remain low at RM2,300/ton in FY19), which shall result in better margins. We estimate that CPO and flour make up over 70% of the group’s raw material costs. 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. However, tepid export sales to key export countries remains a concern for the group.

Maintain BUY. We like HSI for its favourable dividend yield (5.7%), healthy net cash position and reasonable valuations. Despite this, concerns over the brand’s core product in export markets linger. We reduce our PE multiple from 20x to 18x to reflect the riskier sales outlook for the group in export markets. After our earnings and PE adjustments, our TP is lowered to RM1.12 from RM1.28. Our BUY call is unchanged.

Source: Hong Leong Investment Bank Research - 15 May 2019