Hup Seng Industries Bhd
Maintain a buy with a target price (TP) of RM1.24: Hup Seng Industries Bhd’s financial year 2018’s (FY18) adjusted net profit of RM43.7 million came in within our and consensus expectations at 97% and 98% respectively. The group declared a third interim dividend of two sen/share, bringing the year-to-date dividend to six sen (FY17: six sen/share).

 
Our FY18 revenue increased by 2.6% year-on-year (y-o-y) to RM307.4 million attributable to stronger domestic sales up by 4% y-o-y from modern and wholesale channels and marginal growth in export sales increased by 0.4% y-o-y.

However, profit before tax declined to RM57.8 million or 2.7% y-o-y owing to higher input cost and lower export revenue impacted by the stronger ringgit in 1HFY18.

In terms of profitability, FY18 operating margin came in lower at 19.6% (-1 point) owing to abovementioned reasons.

Hup Seng’s cash pile was hefty at RM96.3 million, circa 12 sen per share. The group’s net cash position is viewed favourably as it would support our FY19 dividend per share assumption of six sen.

We raise our FY19 and FY20 earnings projections higher by 4.6% and 1.3% respectively after factoring in the impact from lower operating expenses, which are partly offset by higher input costs.

We also introduce our FY21 earnings forecast of RM53.4 million, representing an earnings growth of 10.1% and increase our dividend expectation of FY19/20 to six sen/six sen from five sen to 5.5 sen.

We are optimistic about the group’s effort in broadening its distribution networks and product innovation to keep the company competitive in the market.

Moreover, the endeavour to rationalise its operations shall keep the company’s operating expenses at a manageable level and reckon Hup Seng to be a gem to dividend-seeking investors who also expect the weakness in the ringgit.

Based on our sensitivity analysis, if the ringgit weakens from 4.05/US dollar to 4.15/US dollar, Hup Seng’s earnings are expected to improve by circa 2%, ceteris paribus, considering 30% of its sales come from exports.

Therefore, we roll forward the valuation base year and raise our TP to RM1.24 (from RM1.19 previously) based on divident discount model valuation (k: 7.8%, g: 2.5%) and maintain a “buy”. — TA Securities, Feb 20