KUALA LUMPUR (July 5): Hong Leong Investment Bank Bhd (HLIB) said today it expects food producers including Berjaya Food Bhd and Hup Seng Industries Bhd to report better profit margins as they benefit from slightly lower prices of commodities like coffee and crude palm oil (CPO) in the second half of 2019 (2H19)
In a note today, HLIB analyst Gan Huan Wen said the research house expects favourable commodity cost to result in better margins, particularly, for Hup Seng Industries, the raw materials of which, is predominantly made up of CPO and flour. Gan said HLIB has a buy call for Hup Seng Industries shares with a target price (TP) of RM1.12.
"Despite the cheaper commodity prices in 2018, they have averaged even lower in 1H19, which theoretically should result in better margins for these companies. Going into 2H19, we expect cheaper coffee prices led by dipping Arabica and Robusta prices from expected stabilising weather in Brazil, the number one coffee producing country. Additionally, HLIB expects CPO price to average significantly lower at RM2,100/mt in FY19 (vs.RM2,318/mt) amid subdued demand, particularly from the EU over environmental concerns.
"We maintain our neutral call on the (consumer) sector given the relatively expensive valuations, particularly amongst large-cap stocks. Our top pick is Berjaya Food. Of the stocks under our coverage, we prefer Berjaya Food (buy; TP: RM2) due to favourable growth prospects as we expect it to sustain SSSG (same-store sales growth) figures of +2.5-3.0% YoY going forward in addition to the opening of 25-30 Starbucks outlets," the analyst said.
At Bursa Malaysia today, Berjaya Food shares were traded unchanged at RM1.62 at 10:20am. At 10:22am, Hup Seng Industries shares were also transacted unchanged at 94.5 sen.