Domestic Growth Surge Boosts 2Q18

YSP’s 2Q18 core profit well exceeded expectations. Anchored by robust domestic growth and better product mix, EBITDA margins jumped 12.4ppts yoy. Export sales were sluggish, led by a decline in its Singapore and Vietnam markets. Maintain BUY with a higher TP of RM4.02 in tandem with our revised earnings based on 14x 2019E EPS.

Domestic Sales See a Growth Spurt

2Q18 revenue grew by 13% yoy to RM67.9m, bringing 1H18 revenue to RM139.4m (+9% yoy). This was on the back of sustained volume growth and better product mix, primarily in the domestic market (17% yoy). We believe the quarter could have been supplemented by trade restocking activities. Manufacturing division continued to be the engine of growth, growing 8% yoy in 1H18. More impressively, the 1H18 manufacturing segment profit grew an astounding 51% yoy due to better product mix and higher economies of scale. Excluding the EI, core net profit came in at RM20.1m (+46% yoy), exceeding expectations at 65% and 70% of ours and consensus earnings full year estimates respectively.

Export Performance Damps An Otherwise Sterling 2Q18 Performance

2Q18’s net profit margin gained 5ppts to 13%, primarily due to headway made by YSP’s manufacturing division. A favourable tax rate in 2Q18 at 23.7% (vs. 33.5% in 2Q17) was a contributing factor as well. Unexpectedly, 1H18 export sales, which usually accounts for 30% of total sales, contracted 8% yoy. Most foreign markets saw a decline, led primarily by Vietnam and Singapore.

Maintain BUY With Revised TP of RM4.02

We lift our 2018-20E earnings estimates by 8%-2% to factor margins gains, forecasting a 2017-19E core EPS CAGR of 21%. We maintain our BUY rating on YSP with a revised target price of RM4.02 in tandem with higher earnings based on an unchanged 14x 2019E EPS. We continue to like the looming structural improvements to the domestic sector including an increasingly export-oriented exposure (38% of total revenue by 2020E) underpinning YSP’s prospects for the foreseeable future. Key downside risks: slowdown in export sales, product recalls, and regulatory risks.

Source: Affin Hwang Research - 14 Aug 2018