1Q21 core PAT of RM9.9m (QoQ: -0.6%, YoY: +1.6%) was below expectations, only made up of 22.6% and 23.2% of our and consensus full year forecasts, respectively. We lower our FY21/22 earnings forecasts by 8.3%/3.5% to account for higher-than-expected raw material prices. After accounting for our earnings adjustment, our TP falls from RM1.00 to RM0.93 pegged to an unchanged 18x PE multiple of mid FY22 earnings. While we like HSI for its favourable dividend yield (6.4%) and net cash position (8.5 sen per share) we expect tepid export and steeper commodity prices to impede near term profitability.

Below expectations. 1Q21 core PAT of RM9.9m (QoQ: -0.6%, YoY: +1.6%) was slightly below our and consensus expectations, only made up of 22.6% and 23.2% of full year forecasts, respectively. The shortfall in earnings was due to due to higher than-expected increase in raw material costs.

Dividend. None declared. (1Q20: None). Dividend is typically declared three times a year, later on in the financial year.

QoQ. Sales declined by -5.7% to RM82.7m on the back of decreased in export markets (-27%) that offset the improvement in domestic market (+2%). The lacklustre showing in export market was due to the global shortage of shipping containers and higher freight charges. Despite lower top line, core PAT remained flat (-0.6%) at RM9.9m due to lower opex and lower effective tax rate by 1.8ppt.

YoY. Top line registered marginal growth of 2.3% driven by the stronger domestic sales (+8%) from wholesale and retail channel that offset the decline in export (-15%). Subsequently, bottom line inched up by 1.6%.

Outlook. Despite the stable sales, HSI gross profit margin has been deteriorating on the back of the higher CPO price. The average CPO price in 1Q21 was approximately 47% higher YoY at RM3,941/MT. Our house expects CPO price to average at RM3,200/MT in 2021 (FY20: RM2,800/MT). Note that CPO makes up approximately 40% of the group’s raw material cost. However, being a consumer staple with non perishable products (i.e. biscuits), we reckon HSI should be able to defend it strong market presence with its variety of product offerings.

Forecasts. We lower our FY21/22 earnings forecasts by 8.3%/3.5% to account for higher input costs.

Downgrade to HOLD, TP: RM0.93. After accounting for earnings adjustment, our TP falls from RM1.00 to RM0.93 pegged to an unchanged 18x PE multiple of mid FY22 earnings. While we like HSI for its favourable dividend yield (6.4%) and net cash position (8.5sen per share) we expect tepid export sales and steeper commodity prices to impede near term profitability. After our TP adjustment, we downgrade our call from Buy to HOLD.

Source: Hong Leong Investment Bank Research - 20 May 2021