3Q20 core PAT of RM12.0m (QoQ: +36.8%, YoY: +18.8%) brought 9M20 sum to RM30.5m (+4.5% YoY). This is in line with ours and consensus expectations, accounting for 73.2% and 74.0%, respectively. We keep our forecasts unchanged. We maintain our BUY call and TP of RM1.00 based on 18x PE multiple of FY21 earnings. At current price levels, HSI is yielding an attractive 6.3%.

In line. 3Q20 core PAT of RM12.0m (QoQ: +36.8%, YoY: +18.8%) brought 9M20 sum to RM30.5m (+4.5% YoY). This is in line with ours and consensus expectations, accounting for 73.2% and 74.0%, respectively. 9M20 core PAT is arrived at after adjusting for a one off RM4.4m in underpayment of sales tax pertaining to previous years.

Dividend. DPS of 2 sen was proposed, entitlement date to be announced at a later date (3Q19: 2 sen). 9M20 DPS amounted to 4 sen (9M19: 4 sen). This is within our expectations.

QoQ. Increase in sales (+22.1%) was from better biscuit sales (+27.7%) due to (i) rebound in export sales; and (ii) seasonal strength. Note that export sales had dipped during 2Q20 due to HSI failing to meet some orders due to transport restrictions associated with the MCO. Core PAT rose 36.8% in tandem with better sales.

YoY. Better domestic sales (+16%) and export sales (+9%), particularly to Myanmar, resulted in top line growing by 13.8%. HSI shared this was achieved as they were able to meet demand during the RMCO period without issue. In tandem with stronger sales, core PAT grew 18.8%.

YTD. Despite transport restrictions impacting export orders during the MCO period earlier in the year, HSI managed to grow export sales by 3%, which was attributed to better sales to Myanmar, Singapore and Indonesia. Coupled with better domestic sales (+10%), revenue grew 8.0%. Core PAT grew by a lesser quantum (+4.5%) than sales growth due to slightly higher raw material cost.

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 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 RM84.1m (10.5 sen per share) as of end-Sep 2020, coupled with strong cash flow generation from its operations.

Forecasts: Unchanged as results are in line

Maintain BUY, TP: RM1.00. We maintain our BUY call and TP of RM1.00 based on 18x PE multiple of FY21 earnings. We reckon HSI remains an attractive stock pick at this juncture given its business operations are relatively unaffected by the recent reimplementation of CMCO rules. Furthermore, at current price levels, it is yielding an attractive 6.3%.

Source: Hong Leong Investment Bank Research - 19 Nov 2020