Review

• Hup Seng Industries Berhad’s (Hup Seng) 1H18 adjusted net profit came in at 44% and 42% of ours and consensus full-year forecasts. However, we deem this as within estimates as results are expected to be back-end loaded due to decreasing crude palm oil price and weakening of Ringgit, which bode well for 2H18 earnings.

• 1H18 revenue increased by 2.6% YoY to RM146.9mn on the back of i) increase domestic sales (+7.0%) from wholesale and modern channels; ii) which partly offset by decline in export sales (-8.0%) due to strong Ringgit in 1H18. PBT declined by 3.4% YoY to RM26.8mn on the back of i) lower export sales from strong Ringgit; and ii) higher operating costs.

• QoQ, revenue declined by 9.6% to RM69.7mn mainly dragged by decline in export sales from Indonesia, Mauritius and Myanmar due to slowdown in sales from these countries. PBT declined by 20.5% QoQ to RM11.9mn due to increase in operating costs which we believe is due to higher energy costs for oven operations and logistics.

• The group declared a first-tier interim dividend of 2.0sen/share during the quarter under review.

Impact

• No change to our earnings forecasts.

Outlook

• Topline growth for Hup Seng is expected to come from improved export sales to the Middle East and China markets on the back of i) higher sales incentives; ii) promotional sponsorship initiatives for the distributors; iii) and weakening of Ringgit to US Dollar in 2H18. 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. Note that crude palm oil price is in a downtrend and the decline is expected to reduce the costs of palm olein for Hup Seng.

• We believe that implementation of tax-break period in Malaysia as well as implementation of Sales and Services Tax (SST) in September would have immaterial impact on Hup Seng’s earnings as the group sells stapled goods, which demand is inelastic to change in price of the goods. However, the increase in minimum wage may pressurise the staff costs to rise further.

Valuation

• Maintain our Buy call on Hup Seng with unchanged target price of RM1.25/share based on DDM valuation (k: 7.6%; g: 2.5%).

Source: TA Research - 16 Aug 2018