HIL’s 1HFY22 results met expectations. Manufacturing earnings grew on the back of stronger demand for automotive parts, but contributions from property segment contracted with limited new launches. It plans to put onto the market more new launches in 2HFY22. We maintain our forecasts, SoP-based TP of RM1.08 and OUTPERFORM call.

Within expectations. 1HFY22 net profit came in within expectations at 46% of our, and 51% consensus, full-year estimate.

Results’ highlights. Revenue rose 35.4% as the group saw stronger contributions from its manufacturing segment. The plastics moulding division sustained its growth throughout 1HFY22 as automotive orders drove revenue up 52% YoY. Overall earnings for the segment grew by almost double as the volume-driven segment benefitted from high demand for automobiles as a result of the SST exemption. Property revenue also grew, by 10% but earnings fell by 30%. We believe this is due to limited launches of new projects in 1HFY22 due to the labour shortage and heightened cost of raw materials.

Overall, net profits grew 28% YoY as the growth in manufacturing earnings offset the contraction in the property division. However, given demand was driven up by the SST exemptions, manufacturing earnings may be slightly front-loaded as auto-related orders may taper going forward.

Outlook. Its 2HFY22 is expected to be a similarly strong, though not without some headwinds. While the manufacturing segment saw strong growth in 1HFY22, the group may see more subdued growth moving forward as the vehicle demand driven by the SST exemption will taper. The segment is still expected to grow as the Malaysian Automotive Association is forecasting c.24% growth in total vehicle sales in 2022. However, combined with increased resin prices, the group may see more subdued earnings growth in the 2HFY22.

Its property earnings are expected to pick up going forward as the group launches new projects later in the year. While 1HFY22 was relatively muted, the group is targeting to launch two of its JV developments in 4QFY22 with a combined GDV of RM275.7m. This is expected to contribute positively to earnings growth, although the bulk will probably be in FY23 given the late launch timeline. Still, we believe it will help offset any margin compression in the manufacturing segment and buoy overall performance.

Forecasts. Maintained.

Maintain OUTPERFORM with an unchanged TP of RM1.08. Our TP is based on the sum of: (a) 10x PER against FY23F manufacturing earnings, in line with the average PER of peers and a 20% discount to the larger automotive sector PER from which it generates the bulk of its revenue, (b) RNAV of the group’s property development projects (WACC: 8.4%), and (c) its consistent net cash position. We continue to believe that the group will benefit from improved demand for its manufacturing services as well as posting stronger results from property segment moving forward. There is no adjustment to TP based on its 3-star ESG rating as appraised by us (see page 3).

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

Source: Kenanga Research - 26 Aug 2022