HSI 3Q21 core PAT of RM3.3m (QoQ: -6.9%, YoY: -72.2%) brought 9M21 sum to RM16.8m (-44.9% YoY). This missed our and consensus expectations, accounting for 49% and 41% of full year forecast, respectively. We are negative on the absence of dividend for this quarter as HSI is known as a stable dividend counter. Additionally, with the still elevated raw material costs (CPO price: +57% YoY) we view that earnings will remain tepid for the remaining of the year. We are ceasing coverage on HSI given the lack of management access. A s such, our forecasts, SELL recommendation and TP of RM0.76 (17x PE on mid FY22 earnings) should no longer be used as a reference going forward.

Below expectations. 3Q21 core PAT of RM3.3m (QoQ: -6.9%, YoY: -72.2%) brought 9M21 sum to RM16.8m (-44.9% YoY). This missed our and consensus expectations, accounting for 49% and 41% of full year forecast, respectively. The deviation was on the back of weaker-than-expected top line coupled with EBITDA margin compression from the elevated raw material costs. 9M21 core PAT is arrived at after adjusting for Wage Subsidy Program amounting to RM750k.

Dividend. None. (3Q20: 2 sen per share). 9M21 DPS amounted to 1.5 (9M20: 4 sen). This is below our expectations.

QoQ. Sales moderated by -2.6% to RM64.8m, yet another record low revenue in the past 5 years. This was on the back of the softness in sales both in domestic and export market. Subsequently, core PAT fell by -6.9% to RM3.3m.

YoY/YTD. Top line dragged by -25.8% YoY/ -10.7% YTD from the 60% workforce constrains coupled with two weeks of production halt in September due to the disinfection works of the premises. Due to this, production tonnage was lower by 30.7% in 3Q21. YTD domestic sales dropped by -7% while export market experienced a larger drag of -21.7%. Bottom line decreased by -72.7% YoY/-44.9% YTD due to weaker sales and EBITDA margin compression by 9.1ppts YoY.

Outlook. We are negative on the absence of dividend for this quarter as HSI is known as a stable dividend counter. Note that HSI had paid out 6 sen DPS in FY18/FY19/FY20 which represented 111%/123%/119% payout ratio of full year earnings, respectively. Recall in the recent news of cancer-causing substances that were allegedly detected in all 60 samples of pre-packaged biscuits and crackers tested by Hong Kong’s consumer watchdog. We view this allegation negatively as consumers might turn cautious following the news which in turn would hamper sales in the near term. Nonetheless we note that Malaysia’s MoH has reassured that the average level of acrylamide content of biscuits and crackers is below the benchmark set by European Commission Regulations. Additionally, with the still elevated raw material costs (CPO price: +57% 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.

Forecast. Unchanged.

Cease coverage. We are ceasing coverage on HSI given the lack of management access. As such, our forecast, SELL recommendation and TP of RM0.76 (17x PE on mid-FY22 earnings) should no longer be used as a reference going forward.

Source: Hong Leong Investment Bank Research - 11 Nov 2021