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This article first appeared in The Edge Financial Daily on February 12, 2018

Hup Seng Industries Bhd
(Feb 9, RM1.10)
Upgrade to buy with an unchanged target price (TP) of RM1.25:
Hup Seng Industries Bhd’s financial year 2017 (FY17) earnings came in slightly above our and consensus full-year estimates at 106% due to higher-than-expected sales. Revenue increased by 4.9% year-on-year (y-o-y) to RM299.7 million for FY17 on the back of higher domestic (+4% y-o-y) sales from wholesale and modern sales channels as well as higher export (+8% y-o-y) sales due to higher demand from existing distributors and the addition of new distributors in China. Profit before tax (PBT), however, declined by 10.4% y-o-y, attributable to higher input costs (refined palm oil), higher marketing expenses and higher operating costs, which pressured its PBT margin down by 3.4 percentage points y-o-y to 19.8%. Quarter-on-quarter, its fourth quarter of FY17 experienced a double-digit growth — from sales to core profit. PBT increased by 47.5% to RM18.9 million on the back of higher revenue, which increased by 22.6% to RM86.2 million. This was mainly driven by higher sales volume domestically and overseas. The group declared a third single-tier interim dividend of two sen per share in the current quarter. Cumulatively, the group has declared a total dividend of six sen per share for FY17, similar to FY16. 

We increase our earnings forecasts by 4.5% and 6% for FY18 and FY19 respectively, projecting higher revenue contributions from domestic and exports sales.

We expect Hup Seng’s FY18 top-line growth to come mainly from higher private consumption in Malaysia, competitive pricing and growing demand from China. However, strengthening of the ringgit against the US dollar is expected to reduce the bottom-line impact. Note that Hup Seng is a net exporter with about 30% of sales from overseas. As such, strengthening of the ringgit may result in translation losses.

We upgrade our call on Hup Seng to “buy”, with an unchanged TP of RM1.25 per share based on discount dividend model valuation. We increase our discount rate from 7.1% to 7.6%, reduce our growth rate from 3% to 2.5%, and increase our dividend per share assumptions from 4.5 to five sen per share to six sen per share for FY18 and FY19. This is after taking into consideration the net cash position of the group and its earnings outlook. Downside risks to our call include lower than-expected dividends, lower-than-expected domestic sales and exports, as well as unexpected events which may impact its sales distribution channels (such as floods and fires). — TA Securities, Feb 9
 

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