2Q19 core PAT of RM9.0m (QoQ: -11.2%, YoY: +2.2%) brought 1H19 core PAT to RM19.1m (YoY: -4.1% YoY). This was below ours and consensus expectations, accounting for just 38.5% and 41.4% of forecasts, respectively. The results shortfall was mainly attributed to lower-than-expected domestic sales. We reduce our FY19/20/21 forecasts by 6.1%/5.1%/4.6% to account for weaker-than expected sales domestic biscuit sales. After our earnings adjustment and rolling over our valuation year from FY19 to FY20, our TP falls from RM1.12 to RM1.08. We like HSI for its favourable dividend yield (5.8%), healthy net cash position and reasonable valuation. Our BUY call is maintained.

Below expectations. 2Q19 core PAT of RM9.0m (QoQ: -11.2%, YoY: +2.2%) brought 1H19 core PAT to RM19.1m (YoY: -4.1). This was below ours and consensus expectations, accounting for just 38.5% and 41.4% of forecasts, respectively. The results shortfall was mainly attributed to lower-than-expected domestic sales.

Dividend. Proposed DPS of 2 sen. 1H19: 2 sen, 1H18: 2 sen per share.

QoQ. Domestic sales declined 12.0% due to Hari Raya Puasa during the quarter was partially mitigated by increased export sales of 6.0%, mainly to Indonesia. Weaker sales (-7.6%) resulted in weaker core PAT of RM9.0m (-11.2%).

YoY. Export sales growth of 4.0% (from Indonesia and Mauritius) combined with 2.0% weaker domestic sales resulted in flat top line (-0.1%). Despite flat top line, core PAT grew marginally by 2.2% from better operational efficiencies.

YTD. Marginally lower sales (-1.2%) was mainly attributed to 6.0% decline in export market, particularly in the sales of biscuits to Saudi Arabia and Thailand. Core PAT declined 4.1% in tandem with poorer top line.

Forecasts: We reduce our FY19/20/21 forecasts by 6.1%/5.1%/4.6% to account for weaker-than-expected sales domestic biscuit sales.

Outlook: Despite significantly lower CPO price in FY19 thus far, Hup Seng has surprisingly not been able to record better gross profit margin. Note that CPO makes up approximately 40% of the group’s raw material cost. 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, TP: RM1.08. We like HSI for its favourable dividend yield (5.8%), healthy net cash position (RM0.09 per share) and reasonable valuations vs larger cap consumer peers. After our earnings cut but partially offset by rolling forward valuation year from FY19 to FY20, our TP falls from RM1.12 to RM1.08 based on an unchanged PE of 18x. Our BUY call is maintained.

Source: Hong Leong Investment Bank Research - 22 Aug 2019