KUALA LUMPUR: AmInvestment Research has initiated coverage on Hup Seng Industries with a fair value of RM1.10 a share based on an FY18 price-to-earnings (PE) of 17 times.
It said on Thursday this is nearly on par with its three-year average forward PE of 17.8 times.
The group is known primarily for its Hup Seng Cream Crackers, which it estimates forms at least 65% of total revenue.
As a whole, its earnings are derived from biscuits, beverages (the In-Comix range) and other agent products (Wang Wang rice crackers and Ong Sam Yong Chinese tea, among others).
“While it is able to charge a premium on its cream crackers given the decades-long history of the product, the group's more recent offerings and beverage line are still trying to carve out a name in a very competitive market,” said the research house.
AmInvestment Research said Hup Seng earns nearly a third of revenue from exports. It has 40 export markets with the top five being Indonesia, Singapore, Myanmar, Thailand and Saudi Arabia.
While sales in both export markets and Malaysia were flat in FY16 due to poor consumer sentiment, revenue from exports had grown faster than the domestic market (at a 4-year CAGR of 7% vs. 4% for Malaysia).
“We deem the growth story to be uncompelling at this stage as the group works to fortify its domestic business beyond the foundation of its cream crackers, and holds back from making a genuine move into China to boost stagnant export earnings.
“We project for net profit to fall further by 3% on-year to RM48mil this year (from RM49mil in FY16), and then softly rebound 5%/4% on-year in FY18/FY19. We expect margins in FY17 to continue to see pressure from high input costs amid limited room to raise selling prices,” AmInvestment Research said.
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