We initiate coverage on HIL Industries with an OUTPERFORM and TP of RM1.08. An established, one-stop, plastic moulding solution provider, it is a Tier-1 OEM manufacturer servicing local automotive as well as the electrical & electronics (E&E) sectors. HIL Industries also runs a property development niche which has grown to dominate earnings by partnering with land owners. However, moving ahead, we expect property earnings to moderate while plastic manufacturing earnings to pick up. Over FY22-23, yearly Core EPS (CEPS) growth of around 14% is expected on robust manufacturing orders, consolidating but still substantial property development profits and rising income from a net cash balance sheet. There is no adjustment to our TP based on ESG for which it is given a 3-star rating as appraised by us.

Robust manufacturing orders: HIL Industries is a Tier-1 OEM supplier of plastic components to local automotive makers and assemblers such as Perodua, Proton, Toyota, Honda and Volkswagen. FY22-23 demand from local automotive players should be solid thanks to sales tax exemption coupled with post-Covid economic restart. The automotive sales tax exemption has actually expired recently in June but vehicles registered (i.e. delivered) before March 2023 remain exempted provided the orders were made by end-June 2022. Launches of new models are also expected to spur demand for new parts.

E&E, telco & IT orders should also pick up: HIL Industries is more than just an injection moulding manufacturer of components but also a one-stop plastic solution provider. With capabilities to make moulds, execute specialised painting, coating or surface decoration as well as assembly work, HIL Industries is able to offer almost an entire upstream injection moulding suite to customers; hence, as the world reverts to a new post-Covid normal, orders for its Penang and Suzhou plants, which cater more to the E&E, telecommunications and IT segments, should also recover.

Consolidating property development contributions likely: Its ongoing Amverton residential projects, with estimated remaining GDV of RM140m, should contribute profits until FY23. Meanwhile, HIL Industries has concluded JVs with land owners (who are also key shareholders of HIL) to develop five residential projects up to FY26. Located in and around the Klang Valley, the combined GDV of these projects is estimated at RM471m.

Personal Protective Equipment (PPE): The group recently ventured into producing healthcare PPEs such as face screens and surgical masks. The contribution is small but YTD returns have paid off most of the outlays.

Strong balance sheet: The group’s net cash stood at RM107m at the end of FY21 and is likely to inch up to about RM114m by end FY23. Not surprisingly, the group typical pays out 20% of annual EPS as dividends. For FY22-23, we are expecting similar payout ratios or DPS of 2.0 sen each year.

Initiate coverage with an OUTPERFORM call and a TP of RM1.08. Our TP is based on the sum of: (a) 10x PER against FY23F manufacturing earnings, (b) RNAV of the group’s property development projects, and (c) net cash holdings which form about a third of current market capitalisation. A TP of RM1.08 translates to 9x FY23F CEPS of 11.6 sen. The 10x manufacturing PER is adopted after considering: (a) ratings for companies with similar business activities, and (b) the automotive sector PER from which HIL Industries derives a sizeable portion of its income while the property development RNAV is discounted using WACC of 8.4%. CEPS growth is a little subdued because we suspect HIL Industries may need time to adjust to rising labour and raw material costs. We expect HIL Industries to pass through much if not all of the cost increases over time but some margin compression is still likely during the transition. ESG is another looming issue. Nevertheless, the group has a good track record and balance sheet is strong, so some CEPS growth is still expected.

Risk to our call include: (i) disruption of supply chain, (ii) higher-than expected material costs as well as (iii) highly dependent on auto and property sectors which are sensitive to interest rates.

Source: Kenanga Research - 17 Aug 2022