Review

• Hup Seng Industries Berhad’s (Hup Seng) 9MFY19 adjusted net profit of RM29.7mn came within ours and consensus expectations at 74% and 70% respectively.

• The group declared a second interim dividend of 2.0sen/share during the quarter under review similar to corresponding period last year, bringing YTD DPS to 4.0sen/share.

• 9MFY19 revenue was flattish at RM221.7mn (+0.1% YoY) as improvement in domestic sales (+0.6% YoY) was offset by weaker export sales (-1.3% YoY). PBT declined to RM40.2mn (-1.3% YoY) as a result of the poorer margin in certain segment.

• Sequentially, 3QFY19 PBT improved 13.6% QoQ primarily due to absence of seasonality affects i.e. Hari Raya Puasa, which led to slower offtakes in domestic market during 2QFY19.

Impact

• We made no changes to our earnings forecasts.

Outlook

• We expect demands in domestic market to be flat-low single digit growth while export market to mark mild negative growth. Thus, profitability and earnings would be dependent on the group’s initiatives of optimising operating expenses.

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

Valuation

• Maintain Hold with unchanged target price of RM0.98 based on DDM valuation (k: 8.8%, g: 2.5%).

Source: TA Research - 20 Nov 2019