BP Plastic (BPPLAS) posted a higher net profit of RM8.3m in 1QFY23 (+10.0%  YoY) despite lower revenue. This is mainly due to better product mix and efficiency from new machineries. Results were in line with our and consensus expectations,  accounting for 27.5% and 24.7% of full-year estimates, respectively. While near-term earnings outlook may continue to be challenged by weak demand on the back of the global economic slowdown, we expect a gradual improvement in operating environment following China’s reopening, coupled with normalising resin prices and freight rates falling back to pre-pandemic levels. We retain our Neutral call with unchanged PE-based TP of RM1.46. On a side note, BPPLAS declared a first interim dividend of 1.5sen (FY22: 1.5sen).

• 1QFY23 revenue fell by 11.1% YoY on lower average selling price (ASP), while sales volume remained unchanged. Nevertheless, it has improved by 6.3%  QoQ on the back of a nascent demand recovery for flexible packaging products.

• 1QFY23 net profit grew 10.0% YoY to RM6.6m mainly due to better product  mix and partly aided by better efficiency from new production lines. Pre-tax  profit margin improved to 9.1% from a recent-low of 5.0% in the preceding  quarter. Lower statutory tax rate of 2.0% is due to reinvestment allowance in  one of its subsidiaries meanwhile, helping cushion the margin squeeze.

• Outlook for the Group in near term is expected to remain challenging.  Nevertheless, there are signs of gradual improvements in the operating  environment in the coming quarters following China’s reopening, coupled with  resin prices and freight rates falling back to pre-pandemic levels. The Group remains committed to investing in cutting-edge technology, with its 10th cast  stretch Film machine commissioned at the end of 2022, and two units of Blown  Co-extrusion machines to be added by end of 2023. Production capacity is  expected to increase to 12,200 MT per month. Along with continuous focus on  better product mix, supply chain, cost management, prudent management and  new market expansion, we anticipate earnings to remain resilient in the coming quarters.

Source: PublicInvest Research - 29 May 2023