PETALING JAYA: The rising raw material costs is the greatest challenge for Hup Seng Industries Bhd currently. TA Securities Research said that some of the group’s raw material prices have accelerated to a new high this month, in particular the prices of wheat and crude palm oil (CPO) which are 8% and 32% higher compared with the financial year 2021 (FY21).

       The group has progressively increased the selling prices of its products to all domestic outlets to partially mitigate the pressure from high input costs, said the research house in its latest report. Based on its checks, the research house said the retail price of Hup Seng cream crackers (428g) has increased by about 10% to RM4.95. It also believed that it is difficult for the group to fully pass-through the cost increase.

       Hence, TA Securities estimated that Hup Seng’s FY22 gross profit margin to be about 29% compared to 32% pre-Covid-19.

       Hup Seng is one of the leading crackers and biscuits manufacturers in the country.

       The group’s FY21 core earnings of RM28mil came below the research house’s estimates at 87% of full-year forecasts. It said the negative variation was mainly due to lower-than-expected sales, owing to shortage of manpower, which affected production and elevated the input cost.As for the revenue for FY21, it fell 9.6% year-on-year (y-o-y) to RM295.8mil as the intermittent mandatory compliance of 60% workforce and weeks of plant suspension in September for disinfection works stunted production.

       Domestic sales dropped 7% against FY20 and exports sales declined by 17% y-o-y.

       During FY21, the prices of key ingredients such as wheat and CPO rose by about 28% y-o-y and about 52% y-o-y respectively.

       Based on all the factors, the research house has cut its FY22 and FY23 earnings forecast by 17.6% and 13.3% respectively.

       Considering the earnings cut alongside the revised valuation, its dividend discount model driven target price of Hup Seng is lowered to 88 sen per share from 98 sen a share previously. It has also downgraded the stock to a “sell’’ from a “hold” previously.

       The massive cut in FY22 is to account for higher input cost assumptions, it said.In terms of valuations, TA Securities raised the discount rate to 9.1% from 8.8% previously in anticipation of a higher interest rate environment.

       Considering the earnings cut alongside the revised valuation, its dividend discount model driven target price of Hup Seng is lowered to 88 sen per share from 98 sen a share previously.

       It has also downgraded the stock to a “sell’’ from a “hold” previously.