Review

• Hup Seng Industries Berhad’s (Hup Seng) 1HFY19 adjusted net profit of RM19.1mn accounted for 45% and 41% of our and consensus forecasts respective. Earnings for the quarter fell at the lower range of our quarterly forecast largely due to lower export sales and a slight dip in margins due to shift in sales mix.

• The group declared a first-tier interim dividend of 2.0sen/share during the quarter under review similar to corresponding period last year.

• 1HFY19 revenue declined by 1.2% YoY to RM145.1mn due to lower offtakes from export markets (-6%YoY) specifically Saudi Arabia and Thailand, which overshadowed slight improvement in domestic sales (+1% YoY). PBT dipped to RM26.4mn (-1.4% YoY) as a result of the weaker export sales. Adjusted net earning had a bigger decline of 5.4% YoY due to under provision of tax in prior year (higher effective tax rate of 27.8% in 1HFY19).

• Sequentially, 2QFY19 PBT dropped 7.6% QoQ primarily due to Hari Raya Puasa, which lead to slower offtakes in domestic market. Consequentially, adjusted net income declined 12.8% QoQ.

Impact

• We cut our FY19/20/21 earnings forecast by 5.4/8.2/12.9% as we reduce our sales assumptions. Correspondingly, DPS forecast has been reduced to 6.0/6.0/6.0sen from 6.0/6.0/6.5sen earlier.

Outlook

• Export market appears to be increasingly challenging in certain countries. We believe Hup Seng’s increasing effort in export market penetration (through expanding its distribution channel) may not be sufficient to weather the challenging environment.

• We expect domestic demand to be flat-low single-digit growth, thus FY19-20 profitability and earnings growth would be dependent on the group’s initiatives of optimising operating expenses.

• Nevertheless, Hup Seng has a strong cash position which we think could allow the company to maintain a 6.0sen/share dividend for an extended period of time (>100% dividend payout based on our projections).

Valuation

• Downgrade to Hold with lower target price of RM0.98 (previously RM1.24), based on DDM valuation (k: 8.8%, g: 2.5%). We have increased the discount rate to 8.8% from 7.8% given that the increasing headwinds and uncertainties.

Source: TA Research - 22 Aug 2019