Review

• Hup Seng Industries Berhad’s (Hup Seng) 9MFY17 earnings came in below our full-year net profit forecast at 57% but within consensus estimates at 73%. This was due to higher-than-expected operating expenses.

• 9M17 revenue increased by 5.2% YoY to RM213.4mn attributable to: i) increase in domestic sales through modern and wholesale channels coupled with ii) higher export sales due to higher demands from existing distributors and new contribution from a new distributor in China. However, 9MFY17 adjusted net profit declined by 11.0% YoY to RM29.7mn on the back of: i) higher input costs as refined palm oil price was still above RM3,000/tonne level despite CPO price declined in the 3Q17, ii) higher promotional expenses, as well as iii) higher fuel costs for oven operations and domestic transportations. These have depressed the net earnings margin by 2.7 p.pts YoY to 14.1% in 9MFY17.

• QoQ, the adjusted net profit improved by 6.2% to RM9.4mn due to higher revenue which increased by 1.6% QoQ to RM70.3mn. This can be attributed to higher biscuit sales domestically due to the seasonality effect.

• The group declared a second single-tier interim dividend of 2.0sen/share in the current quarter.

Impact

• We downgrade our earnings forecast by 20.9% and 17.9% for FY17 and FY18 respectively after increasing our operating costs assumptions.

Outlook

• Management guided that FY17 focus are i) meeting growing market demands, ii) automating operations to reduce staff costs and iii) implementing effective marketing strategies.

• We view that Hup Seng’s topline growth will be derived from i) improving level of private consumption in Malaysia, ii) competitive pricing and iii) growing exports demand from China.

Valuation

• We downgrade our call to HOLD based on DDM valuation with a lower target price of RM1.25/share (RM1.50/share previously) based on unchanged discount rate of 7.1%. Our call is based on the following assumptions; i) refined palm oil still being above RM3,000/tonne level, ii) increasing level of Malaysia private consumption, and iii) management efforts to increase exports sales in China.

Source: TA Research - 16 Nov 2017