Review

• Hup Seng Industries Berhad’s (Hup Seng) 1QFY18 earnings came in within ours and consensus’ full-year estimates at 25% and 27% respectively.

• Revenue increased by 4.5% YoY to RM77.1mn on the back of: 1) higher domestic sales (+6.0%) from modern channels like supermarkets hypermarkets, as well as 2) increased export revenue (+1.0%) due to Ringgit strengthening in 1QFY18. However, 1Q18 PBT reduced by 3.8% YoY to RM14.9mn due to higher operating costs (i.e. staff, transportation, energy costs) as well as higher input costs (i.e. packaging costs).

• QoQ, revenue reduced by 10.5% mainly due to seasonal factor. Contributors to the drop were the wholesale channels within the domestic market as well as Asian regions of export markets. PBT reduced by a greater extent of 21.1% QoQ to RM15.5mn.

• No divided was declared during the quarter under review.

Impact

• No change to our earnings forecasts.

Outlook

• Topline growth for Hup Seng is expected to come from higher export sales in the Middle East and China markets on the back of i) higher sales incentives; and ii) promotional sponsorship activities for the distributors. While domestic sales are expected to grow organically by 2.8% YoY for FY18.

• We maintain our FY18 refined palm oil assumption at average RM3,000/tonne (RM3,300/tonne in FY17) and this will provide earnings support for the year. However, there are other costs like i) packaging; ii) logistics costs and iii) staff costs, which are likely to increase by around 10.3% YoY in FY18. As such, we project net profit margin for FY18 to improve slightly by 0.3%-pt to 14.9% in FY18.

• Based on 60% dividend policy, we project the group to pay out 6sen/share in FY18 (similar in FY17), implying a potential dividend yield of 4.8%.

Valuation

• We downgrade our call from Buy to Hold with an unchanged target price of RM1.25/share based on DDM valuation (k: 7.6%; 2.5%) as we believe that share price has been fully valued. YTD, Hup Seng’s share price has increased by 6.4%%.

Source: TA Research - 16 May 2018