A recent meeting with management reaffirms our cautious optimism stance on BP Plastics Holding Berhad (BPPLAS). While near-term outlook may continue to be challenged by elevated production cost, the Group is showing signs of recovery as demand for the packaging products gradually picking up, underpinned by restocking activities. We also take note that the Group is well-placed to weather economic uncertainties given its debt free capital structure with a total cash level of RM67m. This enables it to capitalise on the next demand up-cycle with the production capacity expansion completed recently in 4Q23. We keep our earnings forecast unchanged. Our Neutral call on BP Plastic retained with an unchanged PE-based target price of RM1.62.

• 1QFY24 results round-up. During the quarter, net profit dropped 8.8% YoY toRM7.6m, despite recording higher revenue (+5.9% YoY), mainly attributable tohigher production costs and effective tax rate. Key variable cost – electricityexpenses increased by approximately 25% YoY due to higher surchargeimposed on heavy industrial users. Pre-tax profit (PBT) margin fell to 8.0% from9.1% in the preceding year corresponding quarter. It was exacerbated by highereffective tax rate due to lower reinvestment allowance.

• Freight rate surge has minimal impact. While the ocean freight containerspot rates have risen sharply since the start of May due to longer transits toavoid the Red Sea, the impact on the Group is relatively muted. The surge infreight rate is mainly on Far East to North Europe and US trade route, whilegeographical location of the Group’s customers was mostly concentrated inAsia Countries (60%) and local market (30%).

• Outlook for the flexible plastic packaging industry continues to be clouded byglobal economic uncertainties and elevated production cost. Despiteheadwinds, the Group seems to be showing signs of recovery as demand forthe packaging products gradually picking up due to restocking activities. Inaddition, Malaysia’s export is expected to continue to grow in tandem with thebottoming out of semiconductor shipments. Moreover, the Group’s newlydeveloped packaging products – premium grade Machine Rolls are makingfurther inroads into the US and European market successfully. However,contribution from this new product to its bottom line remains negligible at thisjuncture.

Source: PublicInvest Research - 21 Jun 2024