Two external factors driving confectionery maker’s growth this year
WITH the strong US dollar and soft commodity prices working in its favour, Hup Seng Industries Bhd is certainly looking to end 2015 on a strong note.
But the biscuit and confectionery manufacturer is cognisant of the uncertainties lying ahead, and it is, therefore, not putting high hopes on being able to carry the momentum into next year.
“We don’t want to paint a robust or rosy growth picture because we are a very conservative company,” Hup Seng executive director Kerk Chian Tung says.
“While 2015 has been good, we remain cautious about 2016 because the effect of the two ‘external factors’ driving the company’s growth this year could well dissipate,” she tells StarBizWeek.
For much of 2015, it is noted that Hup Seng has been able to enjoy high profit margins, averaging around 18%, and strong earnings growth due mainly to what the company regards as the two external factors that are beyond its control. These are the prevailing soft prices of crude palm oil (CPO), which have helped lower the company’s production costs, and the appreciation of the US dollar against the ringgit, which has helped boost foreign exchange (forex) gains.
“We do not get overly joyful over those two external factors even though they have been good news for us because we are mindful that what goes up, will come down,” Kerk says.
“So, we are preparing ourselves for any eventuality; so that when the unfavourable do happen, we will know how to respond accordingly,” she adds.
In preparation for the worst-case scenario, Hup Seng is assuming a rebound in CPO prices next year to around RM2,800 per tonne from the current levels of less than RM2,400 per tonne, and a weaker US dollar, with the exchange rate conservatively estimated at RM3.80 per US dollar, compared with the current levels of around RM4.20 against the greenback.
With these assumptions, Kerk says, Hup Seng’s profit margin is expected to return to the normal level of around 13%.
On a positive note, she points out, the company will continue to work on improving operational efficiencies, reduce wastage and cut redundancies to support the group’s bottom line.
“This is an ongoing effort one can never run out of things on which to improve,” Kerk says.
In terms of stock performance, Hup Seng’s shares can certainly be considered as one of the star performers on Bursa Malaysia this year.
Outperforming the general market, the counter has gained about 68% since the beginning of 2015, compared with the benchmark FBM KL Composite Index (FBM KLCI), which has slid about 5% year to date.
Hup Seng’s shares closed two sen lower at RM1.35 yesterday, thus giving the company a market capitalisation of RM1.1bil.
At its close on Friday, the counter was traded at around 19 times its estimated earnings for the financial year ending Dec 31, 2016.
This compared with the valuations of other food-and-beverage-based counters, such as that of Nestle (M) Bhd at 27 times estimated 2016 earnings; Cocoaland Holdings Bhd at 14 times; Oriental Food Industries Holdings Bhd at 17 times; and Kawan Food Bhd at 20 times.
Overall, Hup Seng is quite a dividend play, with a policy in place since 2009 to pay out at least 60% of net profit to shareholders annually.
So far this year, the group has already declared a dividend payout of 5.5 sen per share, compared with three sen per share previously. This is based on the group’s strong performance for the nine months to Sept 30, 2015.
During the period in review, Hup Seng saw its net profit grow 54% to RM39.3mil from RM25.6mil in the corresponding period last year, thus resulting in the group’s earnings per share rising to 4.92 sen from 3.19 sen previously. The group’s revenue, on the other hand, increased 9.7% to RM206.8mil during the nine-month period this year from RM188.6mil previously.
Biscuit manufacturing remains the major earnings contributor to Hup Seng, accounting for 65% of its net profit; while trading of biscuits, confectionery and other foodstuff accounts for about 34% and its beverage segment contributed only about 1% of earnings.
In general, Hup Seng’s business remains very much focused on the domestic market, which accounts for 85% of its sales, while overseas sales contribute about 15% of the group’s top line.
At present, Hup Seng exports to 20 countries, mainly to Southeast Asia, with Singapore, Indonesia, Thailand and Myanmar being the major ones.
Notably, cream crackers have been the main product of Hup Seng since its founding in the late 1950s by four brothers in the Kerk family.
Based on current turnover, the Batu Pahat-based company is estimated to control one third of the cream-cracker market share in Malaysia.
According to Kerk, Hup Seng’s turnover for cream crackers over the years has been growing at a rate of 2%-4% annually in tandem with Malaysia’s annual population growth of 1%-2%.
“It is a very mature product in a very mature market, and because it is such a mature industry, there is only so much room for the cream cracker business to grow,” Kerk concedes.
Hup Seng is therefore putting its bets on a new product, that is, oat cookies.
“We realise we will come to a ‘plateau’ unless we do new things to generate growth,” Kerk says, noting that the group’s oat cookies under the Naturelle brand will be the new future that the company wants to set.
“We are building a new brand, and new concept and image from scratch at we are doing it at a reasonable pace so that we do not put too much pressure on ourselves and the people working for us,” she adds.
Kerk reveals that a lot of consideration has been put into developing the oat cookies, as Hup Seng wants its new product to be free of preservatives and artificial colouring and flavouring that are commonly used in food production. The ultimate aim, she says, is to have a product with “imported quality with local price”.
“Expansion and growth planning is a very slow and painful journey for us, but it is always a very exciting process,” Kerk reckons.
“But if we don’t set a trend, we won’t be able to set an example... we hope our project will succeed, so that we can build a case study for the future generation to have a point of reference,” she explains.
Hup Seng is now being run by the second generation of the Kerk founding family, while the third generation is gradually being groomed to eventually take over.
Cash is king
Hup Seng has been diligent in building up its cash pile since the 1990s.
As at Sept 30, 2015, the company’s cash and cash equivalents totalled RM112.5mil, up from RM82.6mil as at end-September last year.
“We are asked very often why we keep so much cash, and not invest it... the thing is, we are very careful in investing, as we’ve had bad experience before,” Kerk says, noting that Hup Seng’s past investments in expensive machineries took too long to break even and see returns.
“That is not the way we would like to work, and that’s certainly not the way that could translate into a healthy profit margin for the company,” she explains.
Having learnt some tough lessons about three decades ago, when Hup Seng almost went bankrupt, Kerk says, it is the policy of the company now to staying clear of investing on borrowed money.
“Therefore having cash is important for us... it gives us internally generated funds when we want to expand,” she explains.
Hup Seng is currently looking at expanding its factory in Batu Pahat, Johor, which is already fully packed with ovens, to accommodate a new production line.
On the new production line, which could cost around RM26mil, Kerk says, the group has yet to finalise on whether the line is going to be for cracker or cookie production.
“That will depend on which is the more pressing issue,” she says.