Initiation (5 October 2021)
Resilient consumer goods business and growing paper packaging segment
- Hanwell is involved in the manufacturing, brand management and marketing of fast-moving consumer goods (FMCG). The company also has a 64% stake in SGX-listed Tat Seng Packaging, a paper packaging business whose products cater to the Singapore and China markets.
- Riding on logistics growth. Hanwell’s packaging business is expected to be the main growth driver amidst robust global logistics demand.
- Buoyant demand for consumer goods. While Hanwell’s consumer business has been stable over the past few years, the company plans to expand its consumer goods offerings by 30% in the next 3 to 5 years.
- We initiate with a NEUTRAL recommendation and TP of S$0.42, based on 11.0x FY22 EPS.
Hanwell has a total of four subsidiaries involved in the FMCG business. Its subsidiary Topseller Pte Ltd is a distributor of rice and oil, which includes popular proprietary brands such as Royal Umbrella rice. Tipex Pte. Ltd. distributes paper goods, washroom hygiene products as well as baby and adult diaper, including proprietary brands Beautex. Fortune Food Manufacturing Pte Ltd manufactures noodles, desserts and soya bean-based products such as tofu. SOCMA Trading (M) Sendirian Berhad is one of Hanwell’s marketing and distribution arms in Malaysia.
Paper packaging business the key growth driver
Hanwell has a 64% stake in Singapore-listed Tat Seng Packaging Group Ltd (TSG SP), whose revenue makes up approximately 60% to 66% of Hanwell’s total top line. Amidst the acceleration in e-commerce sales and increased demand for storage materials due to logistics bottlenecks as a result of port congestions and labour shortages, the demand for corrugated cardboard boxes is expected to increase.
Stable contribution from consumer goods
Hanwell’s consumer goods segment has been generating a consistent revenue stream, contributing approximately 33% to 36% over the last 4 years. We expect further growth in this segment as the company expects to expand its offerings by 30% over the next 3 to 5 years.
2020 financial review
Hanwell’s revenue increased by 2.2% YoY to S$471.4mn in FY20, while net profit surged by 180% to S$33.1mn. Even though revenue from the consumer business segment decreased by 2.3% YoY, the overall increase in revenue was mainly backed by the packaging business which rose by 5% YoY. Eliminating one-off government grants of S$5.3mn distributed in FY20 and oneoff expenses of S$5.5mn incurred in FY19 from the loss of disposal of asset held for sale, core PATMI stood at S$11.5mn for FY19 and S$16.9mn for FY20, representing an increase of 47% YoY.
1H21 financial update
Revenue increased by 19.5% YoY to S$257.8mn in 1H21 and gross profit increased by 13.7% to S$57.5mn, even though gross profit margin for 1H21 decreased by 1.14% pts to 22.30%. The drop in margins was mainly due to the consumer business segment, as shipping disruptions and the pandemic spike in Thailand drove up rice prices. Net profit increased by a modest 3.2%, mainly due to the decrease in other income on lower government grants.
Valuation & Action
We initiate Hanwell with a NEUTRAL recommendation and a TP of S$0.42. Our TP is based on 11.0x to its FY22F EPS of S$0.038. While we expect EPS growth in FY22F and FY23F, we see current valuations already in line with that of its peers. The P/E multiple we use is based on the weighted average of Hanwell’s FY22 segmental revenue, split between the paper packaging business and consumer goods segment.
Power crunch to affect manufacturing capacity in the second half of the year; Slowing down of China’s economy likely to affect consumers’ e-commerce spending; Increase in raw material costs will lead to downward pressure on margins.