KEY INVESTMENT HIGHLIGHTS

• Hup Seng's 9MFY24 core PATANCI up +27%yoy, came in within expectations
• Strong growth in revenue driven by higher sales
• Sequentially strong quarterly earnings in 3QFY24
• Maintain NEUTRAL with unchanged TP of RM1.04

Within expectation. Hup Seng Industries (Hup Seng) chalked in 3QFY24 revenue of RM104.4m (+30.2%qoq; +10.9%yoy) and core PATANCI of RM17.3m (+86.5%qoq, +30.4%yoy) which brought 9MFY24 core PATANCI to RM40.7m (+27.2%yoy). This met our full-year FY24 forecast and slightly above consensus at 76% and 86% of full year expectations respectively. A second interim dividend of 2sen/share and a special dividend of 1sen/share were declared during the quarter.

Strong growth in revenue driven by higher sales. Hup Seng's 3QFY24 revenue reached RM104.4m, a +10.9%yoy increase from RM94.2m in 3QFY23, mainly supported by strong domestic and export market demand. Domestic sales rose by 11%, benefiting from expanded distribution across all channels. Export sales also grew by 12%, particularly from key markets like Indonesia, Japan, and Saudi Arabia.

This higher sales recorded was largely driven by production efficiencies from the recent commercial run of a new oven, which has boosted production capacity and output. For 9MFY24, Hup Seng's core earnings improved by +27.2%yoy to RM40.7m was primarily due to the strong revenue uplift, combined with lower input costs for key materials such as sugar, which further supported profitability. Notably, the 9MFY24 gross profit margin has expand to 31.4% compared to 29.6% in 9MFY23 benefiting from both the higher sales volume and cost efficiency measures.

Quarterly earnings growth in 3QFY24. Sequentially, the core PATANCI surged by +86.5%qoq to RM17.3m, supported by a robust 30%qoq increase in revenue. Domestic sales performed strongly across retail and modern trade channels, while export sales continued to be favorable, especially in key markets such as Saudi Arabia, Singapore, and Japan.

Maintain NEUTRAL with unchanged TP of RM1.04. Given that 9MFY24 is within our estimates, we make no changes to our earnings forecast for FY24-26F. Our TP is based on DDM valuation with an consistent 3.0% growth and unchanged WACC of 9.8%.

Outlook. We remain cautiously optimistic about Hup Seng's outlook, given its: (i) stable product demand, (ii) shift in Malaysian consumer preferences towards local products, (iii) consistent dividend payout, and (iv) robust net cash position to safeguard against potential downside risks. However, rising input costs, especially for palm oil and other key raw materials, pose downside risks.

Source: MIDF Research - 7 Nov 2024