This article first appeared in The Edge Financial Daily on May 17, 2018
Hup Seng Industries Bhd
(May 16, RM1.18)
Maintain buy with an unchanged target price (TP) of RM1.38: Hup Seng Industries Bhd’s first quarter of financial year 2018 (1QFY18) core profit after tax (PAT) of RM11.1 million (-23% quarter-on-quarter [q-o-q]; -4.1% year-on-year [y-o-y]) was within our and consensus expectations. The slimmer gross profit margin in 1QFY18 was mainly due to higher input costs. However, we expect this to be short-lived due to lower crude palm oil (CPO) price going forward. We maintain our “buy” call and unchanged TP of RM1.38 based on 20 times FY19 earnings per share of 6.9 sen.
Reported 1QFY18 core PAT of RM11.1 million was broadly in line, accounting for 21.8% and 25.9% of our and consensus expectations, respectively. We expect margins to improve going forward as a result of cheaper CPO price.
Revenue slipped 10.5% q-o-q to RM77.1 million due to seasonally lower sales in both domestic and export markets. Additionally, higher input costs resulted in lower core PAT (-23%) as gross profit margin slipped to 36.7% from 38%.
Revenue grew 4% y-o-y to RM77.1 million from RM73.9 million driven by domestic sales growth (+6%) mainly from modern channel as well as marginal export sales growth (+1%). Core PAT dipped 4.1% to RM11.1 million from RM11.6 million due to similar reasons mentioned above.
Rebounding consumer sentiment supported by the potential abolishment of the goods and services tax in 2018 is expected to bode well for the group’s top line. Despite the slimmer gross profit margin in 1QFY18, weaker CPO prices going forward should result in lower raw material cost. We estimate the CPO price in 2018 to average lower at RM2,500 per tonne versus the average price of RM2,715 in 2017. To date, the CPO price has averaged RM2,465 per tonne. Note that CPO and flour make up over 70% of the group’s raw material cost.
Our forecast is unchanged as the results were in line.
We like Hup Seng for its strong dividend yield, healthy net cash position and expected margin expansion going forward. — Hong Leong Investment Bank Research, May 16