Review

• Hup Seng Industries Berhad’s (Hup Seng) FY18 adjusted net profit of RM43.7mn came in within our and consensus expectations at 97% and 98% respectively. The group declared a third interim dividend of 2.0sen/share, bringing the YTD dividend to 6.0sen (FY17: 6.0sen/share).

• FY18 revenue increased by 2.6% YoY to RM307.4mn attributable to i) stronger domestic sales (+4.0% YoY) from modern and wholesale channels, and marginal growth in exports sales (+0.4% YoY). However, PBT declined to RM57.8mn (-2.7% YoY) owing to i) higher input cost and ii) lower export revenue impacted by stronger Ringgit Malaysia in 1HFY18.

• In terms of profitability, FY18 operating margin came in lower at 19.6% (-1.0 pts) owing to abovementioned reasons.

• Hup Seng’s cash pile was hefty at RM96.3mn, circa 12.0sen/share. The group’s net cash position is viewed favourably as it would support our FY19 DPS assumptions of 6.0sen.

Impact

• We raise our FY19 and FY20 earnings projections higher by 4.6% and 1.3% respectively after factoring impact from lower operating expenses, which is partly offset by higher input costs. We also introduce our FY21 earnings forecast of RM53.4mn, representing an earnings growth of 10.1%.

• We increase our dividend expectation of FY19/20 to 6.0/6.0sen from 5.0/5.5sen.

Outlook

• We are optimistic about the group’s effort in broadening its distribution networks and product innovation to keep the company competitive in the market. Moreover, the endeavour to rationalise its operations shall keep the company’s operating expenses at a manageable level.

• We reckon Hup Seng to be a gem to dividend-seeking investors who also expect Ringgit weakness. Based on our sensitivity analysis, if Ringgit weakens from RM4.05/USD to RM4.15/USD, Hup Seng’s earnings are expected to improve by circa 2.0%, ceteris paribus, considering 30% of its sales come from exports.

Valuation

• We roll forward the valuation base year and raise our target price to RM1.24 (from RM1.19 previously) based on DDM valuation (k: 7.8%, g: 2.5%). Maintain Buy.

Source: TA Research - 20 Feb 2019