HIL’s FY22 results disappointed due to: (i) cost pressures at its manufacturing division, and (ii) lower profit from its property development segment in the absence of major launches. With no major earnings catalysts in sight, we cut our FY23F earnings by 14%, TP by 28% to RM0.81 (from RM1.13), and downgrade our call to UNDERPERFORM from OUTPERFORM.

Below expectations. FY22 results disappointed, missing our forecast and consensus estimate by 20% and 18%, respectively. We believe the variance against our forecast came largely from cost pressures at its manufacturing division and weak property development profits, especially in 4QFY22.

YoY. FY22 revenue remained relatively flat as stronger contributions from its manufacturing segment offset the contraction in property revenue. Growth for the plastics division slowed during 4QFY22, as full-year revenue growth moderated to 40.1% YoY. However, earnings still more than doubled driven by stronger demand for automotive parts. Revenue from its property segment fell 36.6% due to limited launches during the year with earnings falling 62.6% due to delayed launches and limited take up rates.

Overall, net profit fell 22.2% as the contractions in the property segment offset growth in plastics moulding segment. The group also attributes this to stronger base for property earnings in 2HFY21 when there were still partial exemptions on stamp duty from the Home Ownership Campaign which had since ended.

QoQ. 4QFY22 revenue grew 3.7%, largely due to an uptick in property revenue. However, while the segment’s revenue grew 28%, earnings for the segment fell 31%. We believe this could be due to increased expenses surrounding the soft-launch of its townhouse project during 4QFY22. Otherwise, manufacturing revenue contracted minimally by 2.2%. Earnings from the manufacturing segment also contracted 45% due to an uptick in operating costs. Overall, net profit fell 62.5% due to increased operating costs eating into margins.

Outlook. While we expect the top line for automotive manufacturing to remain relatively robust, outlook for other segments are slightly cloudier. On one hand, products demand for the plastics segment should be supported by the record high sales volume of vehicles. Earnings visibility is relatively stable as the group has previously commented that orders are backed up into late 2023. On the other hand, its other segments appear to be struggling slightly. The group has already stated that it is seeing weaker performance at its Chinese subsidiary, while macroeconomic headwinds could dampen the property market in FY23. The consecutive interest rate hikes could also result in limited take-up of the group’s property launches in FY23 as cost of borrowing increases.

Forecasts. We reduce our FY23F earnings by 14% to reflect weaker property earnings amidst economic headwinds, and introduce our FY24 forecasts.

We reduce our TP by 28% to RM0.81 (from RM1.13) as we recalibrate our SoP valuation (see Page 3). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 5).

We are cautious on HIL given: (i) limited earnings visibility for the manufacturing segment beyond 2023, and (iii) expected soft performance of its property launches this year given the soft market condition. We downgrade our rating to UNDERPERFORM from OUTPERFORM.

Risks to our call include: (i) stronger-than-expected recovery in the demand for auto parts as supply-chain constraints ease, (ii) easing in input costs, and (iii) a strong recovery in the property market.

Source: Kenanga Research - 28 Feb 2023