Hup Seng Industries Bhd
(April 10, 88.5 sen)
Maintain hold with a higher fair value (FV) of 88 sen: We maintain our “hold” recommendation on Hup Seng Industries Bhd (HSI) and forecasts, but raise our FV slightly to 88 sen based on 16 times forecasted financial year 2021 (FY21F) earnings per share (EPS) (from 86 sen based on 16 times FY20F EPS previously). We value the company at a three-times-multiple discount to its historical average of 19 times to reflect its weakened growth prospects.

We believe HSI has temporarily benefited from the Covid-19 pandemic as consumers stock up on staple food items with a long shelf life such as cream crackers amid the movement control order (MCO) period. We foresee a pickup in HSI’s sales in the first quarter of FY20 (1QFY20).

However, its sales may taper off or even slump in 2QFY20 as consumers run down their excess supplies.

Meanwhile, we understand that HSI is operating at a reduced capacity during the MCO period. Despite being under the “essential goods” category, we understand that there are still certain operational restrictions.

However, we believe the company has been able to cope with demand from its customers as it can draw down on its inventory of finished goods, which we estimate could last for one to two months.

Looking forward, HSI plans to strengthen its product quality, expand its product portfolio, improve its cost management and broaden its distributor network.

We like HSI for its dominant position in the local cream cracker segment (via Hup Seng Cream Crackers/Biskut Cap Ping Pong). However, the market for the product is saturated and competitive with low entry barriers. It is unable to fully pass on the ever-rising cost due to limited pricing power, resulting in a margin squeeze. While the export market offers room for growth, it is even more competitive as it is crowded with low-cost producers from all over the region. — AmInvestment Bank, April 10