Review

• Hup Seng Industries Berhad’s (Hup Seng) FY17 earnings came in slightly above ours and consensus full-year estimates at 106% due to higher-thanexpected sales.

• FY17 revenue increased by 4.9% YoY to RM299.7mn on the back of i) higher domestic (+4.0% YoY) sales from wholesale and modern sales channels as well as; ii) higher export (+8.0% YoY) sales due to higher demand from existing distributors and addition of new distributors in China. PBT, however, declined by 10.4% YoY attributable to i) higher input costs (i.e. refined palm oil); ii) higher marketing expenses; and; iii) higher operating costs, which pressured PBT margin down by 3.4%-pts YoY to 19.8%.

• QoQ, 4QFY17 experienced double-digit growth from sales to core profit. PBT increased by 47.5% to RM18.9mn on the back of higher revenue which increased by 22.6% to RM86.2mn. This was mainly driven by higher sales volume domestically and overseas.

• The group declared a third single-tier interim dividend of 2.0sen/share in the current quarter. Cumulatively, the group has declared a total dividend of 6.0sen/share for FY17, similar to FY16.

Impact

• We increase our earnings forecasts by 4.5% and 6.0% for FY18 and FY19 respectively, projecting higher revenue contribution from domestic and exports sales.

Outlook

• We expect Hup Seng’s FY18 top-line growth to come mainly from i) higher private consumption in Malaysia, ii) competitive pricing and iii) growing demand from China.

• However, the strengthening of ringgit against US dollar is expected to reduce the bottom line impact. Note that Hup Seng is a net exporter with about 30% of its sales are from overseas. As such, strengthening of Ringgit may result in translation loss.

Valuation

• We upgrade our call to a Buy with unchanged target price of RM1.25/share based on DDM valuation. We increase our discount rate from 7.1% to 7.6%, reduce our growth rate from 3.0% to 2.5% and increase our DPS assumptions from 4.5 – 5.0 sen/share to 6.0 sen/share for FY18 and FY19. This is after taking into consideration the net cash position of the group and earnings outlook. Downside risks to our call includes i) lowerthan-expected dividends, ii) lower-than-expected sales domestically and exports as well as iii) unexpected events which impacts sales distribution

Source: TA Research - 9 Feb 2018