Competition, costs affecting Hup Seng earnings

PETALING JAYA: Hup Seng Industries Bhd earnings outlook for financial year 2023 (FY23) is expected to be underpinned by lower costs of items such as crude palm oil (CPO) and wheat, which are the primary raw materials used in biscuit production.

For FY22, its earnings were dragged by higher competition in the industry and rising cost of commodities, which reduced Hup Seng’s gross profit margin by minus three percentage points year-on-year (y-o-y) to 24.6% for FY22.

Its core profit after tax declined from RM27.8mil in FY21 to RM26.4mil in FY22, said MIDF Research.

Despite that, the research house has raised its forecast for Hup Seng’s FY23 earnings by 11.3% and FY24 by 8.4%. This is after accounting for a lower cost of sales caused by a decrease in the cost of raw materials.

It maintains its “buy’’ call on the stock but revised its target price to 85 sen a share (from 79 sen) based on a dividend discount model valuation with a 2% growth rate.

MIDF Research continues to like Hup Seng, underpinned by relatively stable demand for its biscuits due to its well-known household brand name, consistent dividend payout and strong net cash position of RM62.4mil in FY22.

Downside risks cited include a sharp increase in raw material prices, especially CPO, sugar and wheat flour, which are the main raw materials to manufacture biscuits.

MIDF Research said that on a quarterly basis, Hup Seng’s revenue increased by 35.2% quarter-on-quarter (q-o-q) to RM94.9mil, mainly due to stronger sales in all its three divisions – biscuit manufacturing, beverage manufacturing and trading.

Gross profit margin increased by 7.2 percentage points q-o-q to 29.7% on the back of the higher sales contribution and lower costs as a result of falling raw material prices.

Hence, core profit after tax more than doubled from RM4mil in the third quarter (3Q22) to RM12.4mil in the 4Q22.

On a yearly basis, the group’s revenue for 4Q22 increased by 16% y-o-y to RM94.9mil, mostly due to strong domestic sales growth of 23%, which more than offset a dip in the export market.

As a result, Hup Seng’s core profit after tax improved to RM12.4mil in 4Q22 from RM9.5mil in 4Q21, MIDF Research said.