1Q20 core PAT of RM9.7m (QoQ: -21.6%, YoY: -3.8%). This was in line with ours and consensus expectations, accounting for 23.1% and 22.2% respectively. Despite our forecasted EPS of 5.2 sen in FY20, we do not expect HSI to cut its dividend amount of 6 sen per annum. Note that HSI had paid out 6 sen per share in DPS in FY18 and FY19 which represented 111% and 115% payout ratio of full year earnings, respectively. After rolling over our valuation year from FY20 to FY21, our TP rises from RM0.93 to RM1.00 based on an unchanged 18x PE multiple. As the share price has appreciated 25.9% since we upgraded the stock on 24 Mar 2020, we take this opportunity to downgrade our rating from BUY to Hold. Dividend yield remains attractive at 6.0% with a relatively high degree of certainty.

In line. 1Q20 core PAT of RM9.7m (QoQ: -21.6%, YoY: -3.8%) was in line with ours and consensus expectations, accounting for 23.1% and 22.2% respectively.

Dividend. None declared. (1Q19: None). Dividend is typically declared three times a year, later on in the financial year.

QoQ. Core PAT declined -21.6% in tandem with sales decrease of -7.9%. This was due to (i) seasonality, as 4Q is typically HSI’s strongest quarter as export sales peak during the quarter and (ii) higher raw material costs.

YoY. HSI recorded healthy top line growth of 7.3%, attributed to both domestic (+6%) and export (+12%) (mainly to Singapore, Myanmar and Mauritius) sales. Despite stronger sales growth, core PAT fell slightly by -3.8% due to increased raw material costs. Note that the average CPO price in 1Q20 was approximately 20% higher YoY at RM2,682/MT. CPO makes up approximately 40% of the group’s raw material cost

Forecast. Post annual report update, our FY20 earnings forecast is lowered slightly by 0.7%.

Outlook. Despite our forecasted EPS of 5.2 sen in FY20, we do not expect HSI to cut its dividend amount of 6 sen per annum. Note that HSI had paid out 6 sen per share in DPS in FY18 and FY19 which represented 111% and 115% payout ratio of full year earnings respectively. We do not doubt the group’s ability to pay out 6 sen per share for the foreseeable future given its net cash position of RM56.0m (RM0.07 per share) as of end-Mar 2020, coupled with strong cash flow generation from its operations. Being a consumer staple with non-perishable products (i.e. biscuits), HSI should be relatively less impacted by Covid-19/MCO (production not disrupted) and could even be a beneficiary from panic buying/ stocking up by consumers.

Downgrade to HOLD, TP: RM1.00. After rolling over our valuation year from FY20 to FY21, out TP rises from RM0.93 to RM1.00 based on an unchanged 18x PE multiple. As the share price has appreciated 25.9% since we upgraded the stock to a BUY on 24 Mar 2020, we take this opportunity to downgrade our rating from BUY to HOLD. Dividend yield remains attractive at 6.0% with a relatively high degree of certainty.

Source: Hong Leong Investment Bank Research - 21 May 2020