Higher input costs will likely hamper Hup Seng earnings ahead, says TA Securities

KUALA LUMPUR: Higher input costs resulting from lower sales due to workforce constraints as well as higher-than-expected raw material costs would likely put pressure on Hup Seng Industries Bhd margins for the remainder of the fiscal year 2021 (FY21).

TA Securities Holdings Bhd also noted that Hup Seng did not increase product selling prices in FY20.

However, the research firm believes the company may implement strategic repricing now in FY21 to offset some of the increased input costs.

The research firm also noted that Hup Seng remains focused on innovating new products to improve its product mix, strengthening market distribution alongside rationalising costs.

For instance, the company has designed new products packaging that fit the growing number of dollar stores in Malaysia and has officially enhanced its online capabilities through collaboration with Shopee, TA Securities noted.

Touching on earnings, Hup Seng earnings of RM13.8 million came in below TA Securities’ and consensus estimates, accounting for 33 per cent and 34 per cent of full-year estimates, respectively.

The negative variation was due to lower sales owing to workforce constraints in the second quarter (Q2) FY21 and higher than expected raw materials costs.

The first half (1H) FY21 revenue slipped 2.0 per cent year-on-year (YoY) to RM149.2 million as the intermittent mandatory compliance of 60 per cent workforce stunted productions.

Domestic sales were flat against 1H FY20, yet exports sales declined by 9 per cent YoY.

TA Securities said the fall in export sales can be attributed to the shortage of shipping containers and elevated freight charges, which disrupted deliveries and order flows.

Profit before tax (PBT) dropped 26.4 per cent YoY to RM18.4 million, aggravated by higher raw materials prices in addition to reduced sales revenue.

“We cut our FY21/22/23 earnings forecast by 22.0 per cent/7.2 per cent/5.3per cent.

“The massive cut in FY21 is to account for the underperformance in Q2 FY21, prolonged workforce constraint extended into Q3 FY21 alongside higher input cost assumptions leading to a lower gross profit margin of 28 per cent.

“Besides, our dividend per share (DPS) forecast has been reduced to 4.5/5.0/6.0sen from 6.0/6.0/6.0sen earlier,” TA Securities said.

The research firm maintains ‘Sell’ on Hup Seng with a revised target price of RM0.98 from RM1.00 previously.

Source: New Straits Times


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