This article first appeared in The Edge Malaysia Weekly on December 11, 2023 - December 17, 2023

THE 18% drop from the six-month peak in the share price of Hap Seng Consolidated Bhd (HSC) last week presents an opportunity for those looking for a decent dividend yield on their investments. 

The counter had fallen in the first half of 2023 following its removal from the MSCI Malaysia Index at end-May, bottoming at RM2.953 for a total drop of 57.6% from the peak of RM6.939 on Jan 30, 2023, but providing an attractive yield of 10% based on a dividend per share (DPS) of 30 sen, equivalent to a payout of RM746.9 million.

But those who missed the buying opportunity then may have another chance as HSC’s shares fell to RM4.33 last Thursday, down 18% from a recent high of RM5.268 on Oct 18. At RM4.33, HSC had a market capitalisation of RM10.8 billion.

At this price, the stock offers a yield of over 6%, assuming it maintains a DPS of 30 sen — what it paid for its financial year ended Dec 31, 2022 (FY2022).

In the last five years, HSC’s DPS ranged from 25 sen to 35 sen, or 75% to 97% of its earnings. The group has a dividend policy of paying out not less than 50% of profit after tax. 

For FY2022, HSC registered a net profit of RM950.66 million, an increase of 5.6% from RM900.43 million the year before. For the nine months ended Sept 30, 2023 (9MFY2023), net profit fell 11% to RM763 million from RM852.6 million a year ago.

Its performance this year has been affected by lower contribution from the plantation, property, credit financing and trading divisions. These are four of the six divisions within HSC, the other two being automotive and building materials, which continued to see better year-to-date performance.

Property has been the biggest contributor to the group’s operating profit in four out of the last five years. In FY2022, however, its contribution to group operating profit fell to 14% while the trading division emerged as the top contributor at 27%.

Operating profit for the property division fell 83.9% to RM158.3 million in FY2022 from RM986.2 million in FY2021, while revenue fell over 60% to RM523.9 million due to the absence of land disposals in the year under review. For 9MFY2023, the division reported an operating loss of RM0.5 million, mainly due to an impairment or fair value adjustments on its investment properties.

While profitability has been affected of late, a few things are happening within the division, specifically its venture into the hospitality sector with the opening of its first hotel, the Hyatt Centric Kota Kinabalu in October 2022.

Two more hotels are in the pipeline, namely Hyatt Centric Kuala Lumpur and Hyatt Regency Kuala Lumpur, slated to open from 2025. Although the gestation period for investment properties is longer than property development, the former provide recurring income.

Meanwhile, another development within the group is the change in the business model for the distribution of Mercedes-Benz passenger vehicles from a dealership to an agency. Effective Sept 1, 2023, HSC’s 100%-owned subsidiary Hap Seng Star Sdn Bhd transitioned to the new model while the after sales and services segment remained unchanged.

Industry players say the agency model will see lower costs as there is no need to manage stocks of cars. However, this will be offset by thinner margins under the new model. For 9MFY2023, the auto division saw a 25% jump in operating profit due to improved margins.

Apart from the automotive business, HSC’s building materials division reported improved performance with operating profit rising 45% to RM148 million. This division comprises the quarry, asphalts and bricks operations; the trading of building materials via Hafary Holdings Ltd, which is listed in Singapore; and the retail distribution of ceramic tiles in Malaysia.

Market watchers say there are no near-term catalysts for HSC unless crude palm oil prices trade higher, benefiting its listed plantation arm Hap Seng Plantations Holdings Bhd, which has 39,103ha across five estates in Sabah. 

The 9MFY2023 operating profit for the plantation division fell 60% to RM96.2 million due to higher production costs and CPO prices averaging lower at RM3,994/tonne for 9MFY2023 versus RM5,999 in 9MFY2022. 

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