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15 February 2023. Wednesday
KUALA LUMPUR (Feb 15): MIDF Research maintained its “buy” call on Hup Seng Industries Bhd, with a higher target price (TP) of 85 sen from 79 sen, after the biscuit maker’s results for the financial year ended Dec 31, 2022 (FY2022) exceeded its expectations.
In a research note on Wednesday (Feb 15), the house revised its earnings projections for FY2023-24, preferring Hup Seng for its upside risk, which could be offset by a sharp increase in raw material prices.
“We raise our earnings forecast for FY2023 by 11.3%, and for FY2024 by 8.4%. This is after accounting for lower cost of sales caused by a decrease in the cost of raw materials,” said analyst Genevieve Ng Pei Fen.
Ng prefers Hup Seng, underpinned by the relatively stable demand for its biscuits as a household brand name, as well as its consistent dividend payout and strong net cash position of RM62.4 million in FY2022. The group proposed a dividend of one sen per share for the fourth quarter, bringing the total dividend for FY2022 to two sen per share.
“The earnings outlook for FY2023 is also expected to be underpinned by lower raw material costs, such as for crude palm oil and wheat, which are the primary materials used in biscuit production.
“Meanwhile, Hup Seng is currently trading at an attractive FY2023 price-earnings ratio (PER) of 16.9 times, which is below its five-year historical mean PER of 19.1 times,” she added.
Hup Seng reported a core profit after tax (PAT) of RM26.4 million for FY2022, which exceeded the full-year projection by MIDF at 132.2% and the consensus at 133%.
“”The positive deviation was mainly due to a better-than-expected margin, which was supported by lower costs for certain raw materials,” Ng said.
Year-on-year, however, Ng stated that earnings were dragged by higher competition in the industry and rising cost of commodities, which reduced the gross profit margin by three percentage points to 24.6%, despite revenue rising 7.6% to RM318.2 million due to higher export and domestic sales.
As a result, core PAT declined from RM27.8 million for FY2021 to RM26.4 million for FY2022, she added.
Nevertheless, MIDF maintained “buy”, with a higher TP of 85 sen from 79 sen, based on its divident discount model valuation, with a 2.0% growth rate and revised weighted average cost of capital of 9.8% from 8.9%.
At the time of writing, Hup Seng’s share price had risen by one sen or 1.3% to 78 sen. Its market capitalisation stood at RM624 million.
Read also:Hup Seng’s 4Q net profit rises 28%, helped by higher domestic sales; FY2022 earnings slip 4%
