• Upgrade to BUY (TP: RM1.36). Hup Seng Industries (HSI)’s 9MFY24 net profit of RM40.3mn, marking a significant 28.2% YoY increase, surpassing both ours and consensus estimates. This growth was largely driven by lower input costs for key raw materials and a higher sales volume. Moreover, the commissioning of HSI’s new oven has notably enhanced production capacity, contributing to improved performance and efficiency. Hence, we upgrade HSI to BUY with higher TP of RM1.36 (from RM1.10), pegged at 20.9x PER (+0.5SD above 5-years average PER) to 2025F EPS of 6.5sen, attributed by the acceleration in sales growth.

• Key Highlights. HSI's QoQ revenue grew by 30.2% from RM80.2mn to RM104.4mn, correspondingly, net profit surged by 91.3% supported by strong sales momentum in both domestic and export markets, which expanded by 35% and 13%, respectively. The additional production capacity from the new oven significantly contributed to these gains, enabling the company to meet higher demand effectively.

• Earnings Revision. In light of HSI’s enhanced production capabilities and strong market positioning, we have revised our earnings estimates upward for FY24F, FY25F, and FY26F by 26.9%, 28.4%, and 30.1%, respectively with anticipation of increase in sales volume, supported by the new production line and growing market penetration.

• Outlook. We expect HSI to maintain sales momentum, particularly with the upcoming festive season driving consumer demand. The company’s proactive efforts to strengthen brand equity and capture a larger share of both domestic and export markets, underpin its growth trajectory. Nevertheless, we remain cautious on the rising cost of raw material namely palm oil which could impact margins.

Source: BIMB Securities Research - 7 Nov 2024