Back-end loaded results expected for Hup Seng on cheaper CPO, weaker ringgit

This article first appeared in The Edge Financial Daily, on August 17, 2018.
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Hup Seng Industries Bhd
(August 16, RM1.08)
Maintain buy with an unchanged target price (TP) of RM1.25:
Hup Seng Industries Bhd’s first half of financial year 2018 (1HFY18) adjusted net profit came in at 44% and 42% of our and consensus full-year forecasts. However, we deem this as within estimates as results are expected to be back-end loaded due to the decreasing crude palm oil (CPO) price and weakening of the ringgit, which bode well for 2HFY18 earnings.

1HFY18 revenue increased by 2.6% year-on-year (y-o-y) to RM146.9 million on the back of increased domestic sales (+7%) from wholesale and modern channels, which were partly offset by a decline in export sales (-8%) due to the strong ringgit in 1HFY18. Profit before tax (PBT) declined by 3.4% y-o-y to RM26.8 million on the back of lower export sales from the strong ringgit and higher operating costs.

Quarter-on-quarter (q-o-q) revenue declined by 9.6% to RM69.7 million, mainly dragged down by the decline in export sales from Indonesia, Mauritius and Myanmar due to the slowdown in sales from these countries. PBT declined by 20.5% q-o-q to RM11.9 million due to the increase in operating costs, which we believe is due to higher energy costs for oven operations and logistics.

The group declared a first-tier interim dividend of two sen per share during the quarter under review.

No change to our earnings forecasts.

Top-line growth for Hup Seng is expected to come from improved export sales to the Middle East and China markets on the back of: i) higher sales incentives; ii) promotional sponsorship initiatives for the distributors; iii) and weakening of the ringgit to the US dollar in 2HFY18. Domestic sales are expected to grow organically by 2.8% y-o-y for FY18.

We maintain our FY18 refined palm oil assumption at average RM3,000 per tonne (RM3,300 per tonne in FY17) and this will provide earnings support for the year. Note that the crude palm oil price is on a downtrend and the decline is expected to reduce the cost of palm olein for Hup Seng.

We believe that implementation of the tax-break period in Malaysia as well as implementation of the sales and service tax in September would have immaterial impact on Hup Seng’s earnings as the group sells stapled goods, for which demand is inelastic to change in the price of the goods. However, the increase in minimum wage may pressurise the staff costs to rise further.

Maintain our “buy” call on Hup Seng with an unchanged TP of RM1.25 per share based on dividend discount model valuation (k: 7.6%; g: 2.5%). — TA Securities Research, Aug 16