Stable outlook ahead for Hup Seng sales in FY20F

KUCHING: Analysts have projected a stable outlook for Hup Seng Industries Bhd ( Hup Seng) on a full-year basis in financial year 2020 ( FY20F) but notes that the group will record lower earnings due to margin pressure.

“While we expect quarterly fluctuations due to the altered consumer spending pattern and disruption to the supply chain and logistics throughout the Covid-19 pandemic, we see a stable outlook for Hup Seng’s sales on a full-year basis in FY20F,” AmInvestment Bank Bhd ( AmInvestment Bank) said.

“Domestically, we saw a strong first quarter of FY20 ( 1QFY20) in terms of sales for Hup Seng as consumers stocked up staple food items ahead of the movement control order ( MCO).

“This will have been offset by a soft 2QFY20 as consumers stayed at home and ran down their stock holding during the MCO.”

Post-MCO in the second half of FY20 (2HFY20), the research firm believed the shopping behaviour of consumers will

While we expect quarterly fluctuations due to the altered consumer spending pattern and disruption to the supply chain and logistics throughout the Covid-19 pandemic, we see a stable outlook for Hup Seng’s sales on a full-year basis in FY20F. AmInvestment Bank

gradually return to normal, that is, no more excessive stocking up.

“Similarly, in terms of export sales, Hup Seng’s 1QFY20 numbers were strong, driven by inventory build-up by its overseas distributors ahead of the lockdowns around the globe.

“This will have been offset by a weak 2QFY20 due to the shutdown of the logistics network globally during the peak of the pandemic in the early part of the quarter.

“As more borders reopen from 2HFY20 onwards, we expect Hup Seng’s export sales to gradually normalise, also partly helped by better sales incentives offered to its overseas distributors.

“Typically, export sales (to countries such as China, Thailand, Myanmar, Saudi

Arabia, Indonesia, China and Singapore) make up about 30 per cent of Hup Seng’s total turnover.”

Despite a stable sales outlook in FY20F, AmInvestment Bank forecasted lower earnings due to margin pressure arising from higher cost of input palm oil, which typically makes up approximately 40 per cent of its total input cost.

The research firm believed Hup Seng will not be able to pass on the higher cost to end users given the intense competition for market share as the economy reopens.

“Having factored in an eight per cent year on year increase in palm oil ( versus flattish assumptions previously), our net profit margin projection slips to 13 per cent versus 15 per cent previously.”