Hil Industries Bhd
(March 26, RM1.01)
Non-rated with a fair value of RM1.18. Hil Industries, a leading custom injection moulder of engineering plastics, is well-positioned to benefit from the lower cost of plastic resin and high demand for Perusahaan Otomobil Kedua Sdn Bhd’s (Perodua) Axia, while its successful property ventures into affordable housing enabled the group’s earnings to grow impressively.

The manufacturing division of the group is involved in plastic injection moulding which produces plastic original equipment manufacturer (OEM) parts mainly for automotive and IT-related products. Its customers include Perodua, Proton Holdings Bhd, Toyota Motor Corp, Honda Motor Co Ltd and others.

The manufacturing division posted encouraging results in the fourth quarter of financial year 2014 (4QFY14) when profit before tax of the division climbed 32% quarter-on-quarter (q-o-q), lifted by spillover demand for OEM parts amid strong sales of Perodua Axia.

We expect the well-received Perodua Axia to continue driving the earnings growth of the division.

Meanwhile, the group is poised to benefit from the falling crude oil prices as the price of its major cost component — plastic resin, which is a by-product of crude oil, has fallen.

The group has made its foray into property development in the Klang Valley in the past few years. Its maiden property project of the group in Shah Alam, Selangor, with a total gross development value (GDV) of RM110 million has enjoyed a good take-up rate of at least 90%, as the group offers mainly affordable housing such as terraced houses, cluster semi-dees and semi-dees.

Moving forward, the group remains focused on offering affordable housing in Shah Alam by having two property projects in the pipeline with a total GDV of RM105 million, which will be launched in the second half of this year.

We are optimistic about the outlook for the group’s property division despite the weak sentiment in the property market as the group is mainly selling affordable housing which will be less affected by the tepid sentiment.

The group posted encouraging earnings in 4QFY14 recently where its 4QFY14 earnings jumped 264% year-on-year (y-o-y) and 47% q-o-q, mainly driven by the ballooning earnings’ contribution from property division and improved performance in the manufacturing division. That lifted full-year earnings in FY14 to grow at an impressive 641% y-o-y.

On earnings outlook, we estimate the group’s earnings in FY15 to grow at 29%, underpinned by strong unbilled sales of RM50 million, a slew of property launches in the pipeline, and an improving margin for the manufacturing division pursuant to lower cost of plastic resin.

The group is in the midst of expanding its land bank by targeting a piece of land in Klang for property development. We understand that the land size is around 30 acres (12ha) which could potentially contribute a GDV of RM190 million if the deal materialises. We reckon that the potential land acquisition would serve as a catalyst to the group and further propel the earnings growth in property division going forward.

The funding for the potential land acquisition is not an issue for the group in view of its net cash position with total cash of RM108 million in its coffers. — JF Apex, March 26

This article first appeared in The Edge Financial Daily, on March 27, 2015.