2Q21 core PAT of RM3.6m (QoQ: -63.1%, YoY: -59.1%) brought 1H21 sum to RM13.4m (-27.3% YoY). This is below our and consensus expectations, which only made up of 34.9% and 33.2% of full year forecasts, respectively. The shortfall in earnings was due to lower-than-expected revenue and EBITDA margin. We lower our FY21-23 earnings forecasts by -12%/-11%/-10%, respectively. Post earnings adjustments, our TP falls from RM0.91 to RM0.81 pegged to an unchanged 18x PE multiple of mid FY22 earnings. While we like HSI for its net cash position (6.6 sen per share), we expect tepid sales and steeper commodity prices to impede profitability. The lower dividend (1.5 sen vs 2.0 sen SPLY) may also cause some share price weakness as HSI has traditionally been viewed as a stable dividend paying stock. Downgrade to SELL.

Below expectations. 2Q21 core PAT of RM3.6m (QoQ: -63.1%, YoY: -59.1%) brought 1H21’s sum to RM13.4m (-27.2% YoY). This is below our and consensus expectations, only made up of 34.9% and 33.2% of full year forecasts, respectively. The shortfall in earnings was due to lower-than-expected revenue and EBITDA margin.

Dividend. Declared interim dividend of 1.5 sen per share (2Q20: 2 sen per share). The entitlement date will be announced in due course.

QoQ/YoY. Sales declined by -17.8% QoQ/ -6.9% YoY to RM66.5m, the lowest ever recorded in 5 years on the back of 60% production capacity constraint. It was further aggravated by the higher raw material prices that caused the EBITDA margin to contract by 8.2ppt QoQ/ 8.6ppt YoY. Subsequently, core PAT dived in further to RM3.6m (-63.1% QoQ/ -59.1% YoY) to RM3.6m.

YTD. Top line was marginally lower by -2.0% to RM149.2m. Domestic sales remained stable, while export market saw a decline of -9% dragged by softer sales in Myanmar. In turn, bottom line plunged by -27.2% to RM13.4m on the back of lower EBITDA margin by -4.0ppt due to increase in raw materials and packaging materials.

Outlook. With the constraint in production capacity amidst Phase 1 restrictions in Johor (where most of the plants are located), we opine that top line will remain subdued in the near term. Coupled with the higher cost of raw materials (CPO price: +64% YoY), we view that earnings will remain tepid for the remaining of the year. Note that CPO makes up approximately 40% of the group’s raw material cost.

Forecasts. We lower FY21-23 earnings forecasts by -12%/-11%/-10%, respectively to account for lower revenue and elevated input costs. We also lower our FY21 DPS forecast from 6 sen to 4.5 sen given the weaker earnings outlook.

Downgrade to SELL from Hold with lower TP of RM0.81. Post earnings adjustments, our TP falls from RM0.91 to RM0.82 pegged to unchanged 18x PE multiple on mid-FY22 earnings. While we like HSI for its net cash position (6.6 sen per share), we expect tepid sales and steeper commodity prices to impede near term profitability. The lower dividend may also cause some share price weakness as HSI has traditionally been viewed as a stable dividend paying stock. With the lower TP, we downgrade our call from Hold to SELL.

Source: Hong Leong Investment Bank Research - 12 Aug 2021