Review

• Hup Seng Industries Berhad’s (Hup Seng) 9M18 adjusted net profit of RM30.9mn came in at 68% and 67% of ours and consensus full-year forecasts. However, we deem this within estimates as FY18 earnings are expected to be back-end loaded underpinned by Ringgit weakening, which bodes well for export sales, and lower sugar costs.

• 9M18 revenue increased by 3.8% YoY to RM221.5mn attributable to i) stronger domestic sales (+6.0% YoY) from modern and wholesale channels, which partially offset by ii) lower export sales (-3.0% YoY) due to strong Ringgit. PBT was relatively flat at RM40.7mn (+0.4% YoY) on the back of higher operating costs which we believe this was due to increase in staff costs from foreign worker levy.

• 3Q18 revenue improved by 7.0% QoQ to RM74.6mn due to higher sales domestically and exports. PBT increased by 17.4% QoQ to RM13.9mn and we attributed this to higher costs efficiencies. Note that 3Q18 PBT margin rose by 1.6%-pts QoQ to 18.7%.

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

Impact

• No change to our earnings forecasts.

Outlook

• 4Q18 earnings are expected to be boosted by i) stronger export sales following the weakening of Ringgit QoQ; ii) higher domestic sales from yearend school holiday season; and iii) continuous management efforts in implementing costs efficiencies across the operations.

• For FY19, we are cautious on the outlook as i) the expected decrease in granulated white sugar cost, which the government has recently reduced the retail price to RM2.85/kg from RM2.95/kg is expected to be offset by ii) surge in flour price by 5.0% to an estimated RM2,300/tonne and iii) higher carton packaging cost. Also, we foresee higher operational costs coming from i) increase in minimum wage; ii) re-floating of petrol pump price after 2Q19 which would increase transportation costs; and iii) higher marketing expenses to remain competitive in the market, which would dampen FY19 earnings.

Valuation

• Maintain Sell on Hup Seng with unchanged target price of RM1.12/share based on DDM valuation (k: 8.1%; g: 2.5%) as we foresee strong headwinds in 2019.

Source: TA Research - 22 Nov 2018