HUP SENG INDUSTRIES BHD

Key Points:


Price: RM1.88 (as of 19-Nov-2010) close

Historical dividend yield of 12.75sen or 6.8%. Dividend for this year likely to surpass last year level

At historical PER of 8.39x, it is comparatively low vs. other F&B player such as Apollo (11.15x) & Hwa Tai (11.81x)

Got potential to go up to RM2.24

Company Background

Based in Johor, HUPSENG manufactures, markets and distributes FMCG products locally and to over 40 countries. Established in 1958, HUPSENG has been a household name synonymous with quality biscuit manufacturing. Some of the Company’s main products include Ping Pong cream crackers, Marie biscuits, In-Comix instant coffee and Wang Wang series of biscuits.

Since listed on November 2000, the Kerk family remained as the main owners of the Company with 55.4% ownership as of 22 March 2010. This shows the commitment from the Management to continue to manage the Company.


Mr Keh (Kerk) Chu Koh is the Chairman of the Company. With his approximately 51 years of experience in the biscuits industry, he plans the Group’s strategic business development and production development which includes the installation of various production facilities in the Group’s factory and heads the research and development team which researches new varieties of biscuits.



Financials

FY2009 revenue is 3.1% lower vs. FY2008. However, profit before tax surged 67.8% to RM35.8m from RM21.3m. In the Company’s Annual Report Chairman’s Statement, it was mentioned that “The much improved performance was attributed to favourable key input costs and continued cost control measures.”

Current ratio improved from 2.31x in FY2008 to 3.14x as of 9MYTD2010 with net cash position of RM53.1m or 44.25 sen per share. The Company’s free cash flows jumped significantly from RM10.1m in FY2008 to RM30.7m in FY2009.

Lastly, HUPSENG has established dividend policy of paying at least 60% of its PAT on 11 Oct 2009.

3Q2010 Result Highlights :

• 9M2010 revenue increased 1.2% to RM161.1m with better gross profit margin and pretax profit margin

• 9M2010 pretax profit recorded healthy organic growth of 4.4%
• But q-o-q net income drop slightly due to lower sales and increase in certain material prices

• Dividend of 7 sen declared (vs. none in 3Q09). If you buy now, still entitled to the dividend.

• Balance sheet remained no gearing and cash per share surged to 44.25 sen per share (vs. 39.88 sen in 2Q10)
• In the Quarterly announcement, it was stated that “The Board is optimistic of the Group performance in the current financial year based on the underlying sustainability of economic recovery. Nevertheless, the Group is mindful of the recent increasing prices of certain raw materials and to a lesser extent, the foreign exchange volatility.”
My view:
• Usually F&B company which consistently deliver dividend year in and year out should worth at least 10x PER.

• If the market eventually price HUP SENG at 10x Historical PER, then market will price HUP SENG at RM2.24