Review

• Hup Seng Industries Berhad’s (Hup Seng) 1HFY17 results came in at 39% of our full-year forecast and 49% of consensus estimates. We view our full-year forecasts to be within forecasts while consensus to be above estimates as we believe that FY17 earnings will be back-end loaded underpinned by lower palm oil cost in 2H17.

• 1HFY17 adjusted net profit declined by 10.1% YoY to RM20.3mn due to higher material costs (i.e. palm oil, fats and packaging costs) as compared to the previous year. On the other hand, revenue increased by 3.5% YoY to RM143.1mn led by 20% growth in exports sales. Note that export sales accounted for about 30% of Hup Seng’s total revenue. The increase in exports has mitigated the decline in domestic sales by 2% due to some issues in East Malaysia market like i) burnt down of an agent’s shop lot and ii) reduction in foreign workers which has led to reduce in demand for Hup Seng products.

• QoQ, 2QFY17 adjusted net profit declined by 23.2% to RM8.8mn due to lower domestic demand during the quarter. This was in tandem with the decline in revenue by 6.2% QoQ to RM69.3mn due to weaker demand during Ramadhan season.

• The group declared a single-tier interim dividend of 2sen/share.

Impact

• No change in earnings forecasts.

Outlook

• Management guided that strategies for FY17 include i) efforts to meet growing demands, ii) initiative to improve efficiency through automated operations, and iii) opting for a more effective marketing strategy.

• Even though Hup Seng has not increased product prices since 2011, we believe that topline growth will come from increasing export sales and improved consumer sentiment. Note that 2Q17 consumer sentiment has improved to 80.7 index level.

• We believe that bottom-line growth will be supported by declining commodity prices like palm oil and sugar in 2HFY17. Note that raw materials account for around 80% of the costs of sales.

Valuation

• We maintain our Buy call on Hup Seng with an unchanged target price of RM1.50/share based on DDM valuation (k: 7.1%, g: 3.0%). Factors affecting our call are i) increasing export sales, ii) lower commodity prices in 2H17 and iii) weak Ringgit supporting exports sales.

Source: TA Research - 16 Aug 2017