By Stella Goh – As published in Inve$t Malaysia 8 May 2020 issue
Hup Seng Industries Berhad (HUPSENG) was founded in 1991 and is based in Kuala Lumpur. The company is one of the leading and established biscuits manufacturers in Malaysia.
HUPSENG was listed in Main Market of Bursa Malaysia on 2 November 2000. With a strong line of established brands, “Hup Seng Cream Crackers” is well known for its excellent taste and quality which serves all consumer groups. The products have been awarded the Gold Medal consecutively for years 1994 to 2003 and Grand Gold Medal for years 2004 to 2019 awarded by Monde Selection, Belgium. It also garnered the “International High-Quality Trophy” award in 2017 and won the “25 Years Trophy” in 2018 by Monde Selection, Belgium.
In West Malaysia HUPSENG has 6 sales networks namely the Klang Valley, Kota Bahru, Kuantan, Ipoh, Butterworth and Alor Setar. There are another 7 distributors in East Malaysia located in Kota Kinabalu, Tawau, Sandakan, Kuching, Bintulu, Miri and Sibu.
HUPSENG’s three main business segments are biscuit manufacturing, beverage manufacturing and a trading division.
The biscuits range of key iconic brands include a diversified brand portfolio spanning from savory to sweet biscuits and are marketed as “Cap Ping Pong” and “Hup Seng Cream Crackers”. The “Kerk” and “Naturell” brand products are catered to upmarket consumers who prefer high-quality premium products and health conscious consumer groups.
The beverage segment consists of wholesale coffee mix and various kinds of food stuff. HUPSENG’s beverage range marketed under the “In-Comix” brand has three main categories namely “3 in 1 Instant Coffee Mix”, “Instant Teas”, Nutritious Instant Cereal” among others.
HUPSENG’s trading division engages in the business of sales and distribution of biscuits, confectionery and foodstuff. The company offers Special Cream Crackers, Marie Biscuits, Coffee Marie Biscuits, Coconut Cookies, Butter Cookies, Peanut Butter Sandwich, Lingo Assorted Biscuits, Fancy Assorted Biscuits and many more. The company is also the distributor for other agent’s products such as “Wang Wang” rice crackers etc.
HUPSENG has paid out a favourable dividend of 6sen per share each year for the past three years. The company has maintained an average dividend payout ratio of 111.73% over the past 3 financial years indicating that the company is paying out more dividend to shareholders than its earnings. And by paying out 100% of its annual net profit as dividends, it has exceeded its own dividend policy practice of paying out at least 60% of its net profit per year as dividends. (refer to Prospects & Challenges and Insight at the end of this article)
HUPSENG has achieved a consistent growth in its quality of earnings over the past 3 years (1.298 times) in FY2019 compared to 1.143 times in FY2018 indicating that the operating cash flow generated from the business is more than the net income suggesting that the business has strong cash flow and is financially sound.
Based on the computation of liquidity ratio, HUPSENG has achieved a current ratio of 1.960 times in FY2019 over the past 3 years indicating that the company does not face any liquidity issue as it is capable of paying back its current liabilities (RM75.175 million) if any unforeseeable circumstances occur. Even though the current ratio has decreasing to the lowest in FY2019, HUPSENG still able to do so by using the current assets such as inventories, trade and other receivables, prepayments, cash and bank balances amounting to RM147.362 million.
HUPSENG has a lower gross profit margin of 34.02% in FY2019 as compared to 35.71% in previous year. The gross profit margin is the lowest in FY2019 mainly due to the higher cost of production of RM309.539 million arising from higher and fluctuating material costs.
Despite the crude palm oil (CPO) price averaging RM2,133 per tonne in the first half of 2019 (1H19), which was significantly lower than the average in 1H18 (RM2,442 per tonne), HUPSENG guided that it had been unable to recognize lower palm oil cost as the closure of many smaller palm oil refiners meant that large players can keep refined palm oil prices high despite lower CPO prices. It resulted in the increase in the materials cost as it is about 40% of the raw material cost made up from CPO. In Q4 2019, the economy started to slow to 3.6%, contracting to 4.3% for the full year (compared to 4.7% growth in 2018) due to lower output of palm oil, crude oil and natural gas, and a fall in exports amid the Sino US trade war.
HUPSENG has achieved the highest Return on Equity (ROE) of 27.36% in FY2019. Based on 3 years CAGR basis, the company’s Return on Equity has grown 0.46%.
Even though the gross profit margin has decreased in FY2019, the increase in Return on Equity (ROE) can be attributed to the decrease of total equity from RM158.270 million in FY2018 to RM151.801 million in FY2019. And it is also an indication that as there is more sales produced by the company relative to its assets, the more profitable it should be and the higher the ROE it earns since it has an asset turnover ratio of 132.17%. The management of the company is seen as effective and capable in deploying the resources in the company as well.
HUPSENG has achieved the highest Total Debt to Equity ratio of 0.543 times in FY2019 among three financial years. Even though the Total Debt to Equity ratio of HUPSENG has increased in FY2019, the company is still able to pay off its debt obligations as the Total Debt to Equity ratio based on 3 years is almost lower than half of its liabilities compared to its equity. This may also indicate HUPSENG has a lower risk, since the debt holders have less claim on the company’s assets.
Cash Flow Statement
The net cash from operating activities has provided a positive cash flow of RM51.192 million in FY2019 as compared to RM45.95 million in FY2018 indicating that the company is healthy and has enough cash to use for business expansion.
The net cash from investing activities in FY2019 (-RM13.696 million) in FY2019 was mainly due to the purchase of Property, Plant and Equipment (RM16.558 million) and purchase of right-of-use-assets (RM127,200). The negative cash flow indicates that the firm is continuing to invest in its business for growth.
The net cash from financing activities in FY2019 (RM48.295 million) was mainly due to dividend paid on ordinary shares (RM48 million) and repayment for lease liabilities (RM294,586).
Prospect and Challenges
FY2020 will remain a challenging year due to global protectionism, uncertainty of the US monetary policy in global economy, the unsettled Sino-US trade standoff, the slowdown of China’s economic growth as well as COVID-19 pandemic. HUPSENG plans to further strengthen its product quality, expand its product portfolio, focus on costs management and broaden its distributor network.
HUPSENG had formulated a strong advertising & promotional strategy led by bestselling and high-quality products at strategic consumer touch points in FY2020. Plans were to also be present at hypermarkets and mini markets with stepped up promotions through sampling activities. However the Extended MCO prevented all those plans from being implemented which turned out to be not a bad thing after-all. In their rush to stock up on foodstuff, consumers snapped up everything leaving empty display shelfs in every retail outlet nationwide.
If not for the Covid-19 pandemic and MCO, the company’s sales teams often go to schools to offer sampling packs to children to allow young generation from the 90’s and 00’s to understand the company’s range of foodstuff. The company is also ready to consider entering the online market to provide greater convenience to consumers. A new cracker line is also slated to be operational by FY2020. The company also is trying out new recipes to expand its product range which should help to improve the utilisation rate of its baking lines.
In 2019, in order to have a more systematic management, HUPSENG had produced a new and upgraded version of its Mobile Sales Systems (MSS) to enhance and simplify the handling and processing of daily orders by the sales teams and enabling the sales team to perform more efficient customer relationship management through better customers’ order information, product information at anytime-anywhere to meet the company’s processing requirements. The MSS also helps to strengthen customer after-sales service and establish a strong relationship.
Return on Equity (ROE) = Excellent
Revenue [CAGR] = Poor
Net Earnings [CAGR] = Poor
Dividend Yield = Good
Interest Coverage = Excellent
Quality of Earnings = Excellent
Hup Seng Industries Berhad Share Price Over 3 Years
Based on the calculation of Gordon Growth Model, HUPSENG has an intrinsic value of RM1.133. The current share price of HUPSENG is RM0.955 which makes it in the range of fair value (as at 6 May 2020). HUPSENG has a beta of 0.515 (500 days) indicating that the share price is less volatile than the current market. Based on computation of Compound Annual Growth Rate (CAGR), HUPSENG has an expected market return of 0.79%.
In conclusion, HUPSENG is a favourite among dividend hungry investors because of its consistently strong dividend payout. However investors still need to consider a host of other factors apart from dividend when analysing a company in view of weak global economic outlook and challenges ahead. Whilst in the midst of the extended MCO, we do not know if the company’s production capacity as well as it’s delivery logistics has been affected but we can observe that biscuits and such pre-packed foodstuff were the first to fly off the shelves as soon as the MCO was announced.
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