Review

• Hup Seng Industries Berhad’s (Hup Seng) 1QFY19 adjusted net profit of RM10.3mn, was within our and consensus expectations at 23% and 22% of full-year forecast respectively. No dividend was declared for the quarter under review.

• 1QFY19 revenue declined by 2.3% YoY to RM75.4mn due to lower offtakes from export markets (-15%YoY) i.e. Saudi Arabia, Indonesia, Vietnam, Mauritius and Thailand, which overshadowed stronger domestic sales (+3% YoY) from modern and wholesale channels. PBT dipped to RM14.3mn (-4.2% YoY) as a result of the weaker export sales. Adjusted net earning had a bigger decline of 10.3% YoY, caused by higher effective tax rate of 29.4% due to under provision of tax in prior year.

• Sequentially, 1QFY19 PBT dropped 16.3% QoQ primarily due to i) sales reduction from Asia regions, and ii) season factor (4Q typically contributes higher earnings, in the range of 27%-32% of full-year earnings).

Impact

• We inputted FY18 audited figures and cut our FY19 export sales assumption by 9%. These have led to slight declines in our FY19-21 earnings by -3.6/-1.6/- 1.8%.

Outlook

• We remain positive on the group’s effort in broadening its distribution networks and product innovation to keep the company competitive in the market. Moreover, its focus to rationalise operations should keep the group’s operating expenses at a manageable level.

• We reckon Hup Seng is a jewel to dividend-seeking investors who also expect Ringgit weakness. Based on our sensitivity analysis, if Ringgit weakens from RM4.10/USD to RM4.20/USD, Hup Seng’s FY19 earnings are expected to improve by circa 2.0%, considering 30% of its sales come from exports.

Valuation

• Maintain Buy with target price unchanged at RM1.24, based on DDM valuation (k: 7.8%, g: 2.5%).

Source: TA Research - 15 May 2019