Analysts slash target prices for HPP after 3Q earnings miss

KUALA LUMPUR (April 25): Analysts covering HPP Holdings Bhd have slashed their target prices (TPs) for the stock, after the packaging maker’s results for the third quarter ended Feb 28, 2023 (3QFY2023) failed to meet expectations.

In a note on Tuesday (April 25), CGS-CIMB analyst Khoo Zhen Ye said HPP’s core net profit for the nine-month period ended Feb 28, 2023 (9MFY2023) came out 0.6% lower year-on-year (y-o-y) at RM8.2 million, which was below estimates at 59.6% of both the research house’s and Bloomberg consensus full-year forecasts.

Khoo attributed HPP's underperformance to lower-than-expected revenue from its electronics and electrical (E&E) business segment, which contributed the bulk or 63% of HPP’s full-year revenue in FY2022.

“[This is] illustrated by lower sales at its corrugated packaging (-54.9% y-o-y) and manufacturing of rigid boxes segments (-68% y-o-y), which mainly cater to its E&E customer base, albeit mitigated by higher sales at its non-corrugated packaging (36.6% y-o-y; primarily stemming from its sole customer in the condom industry) and other segments (12.8% y-o-y),” the analyst said.

Nonetheless, Khoo noted that HPP’s gross profit margins rose in 3QFY2023 to 21.1% and in 9MFY2023 to 24.08%, thanks to a decrease in cost of raw materials as global supply of paper improved.

“Going forward, we project a more subdued earnings outlook for HPP given the demand downcycle for E&E consumer products (possibly due to high inflationary pressures),” he added.

In view of the more subdued earnings outlook due to the declining demand for paper packaging in the E&E sector, Khoo said he downgraded HPP to “hold” from “add” and cut its FY2023-25 forecast earnings per share (EPS) by 30.8% to 31%.

“In line with our EPS cuts, our TP drops to 32 sen (12 times calendar year 2024 [CY2024] forecast price-earnings, -1 standard deviation from its five-year historical mean), from 55 sen previously,” he added.

Meanwhile, Kenanga Research analyst Tan Jia Hui said HPP’s 9MFY2023 core net profit came in at only 50% of its full-year forecast, likewise attributing its underperformance to the weak sales in the consumer electronics segment.

Tan added the research house cut HPP’s FY2023-24 forecast earnings by 27% and 16% to reflect softer demand from its E&E customers on the slowing global economy, but reiterated its “outperform” call on the stock.

“Corresponding, we reduce our TP by 17% to 44 sen (from 53 sen) based on 13 times FY2024 forecast PER (price-to-earnings), at a premium to the average historical forward PER of 10 times for the manufacturing sector largely to reflect HPP’s solid client base,” Tan said in a note on Tuesday.

However, the Kenanga analyst foresees a more promising FY2024 for HPP in view of a recovery in consumer electronics demand, sustained demand growth in condom, food and beverage, and pharmaceutical segments, as well as maiden contributions from its paper pulp moulding segment.

Shares of HPP, which slipped half a sen or 1.67% to 29.5 sen at around 10.35am, later lost another half sen to close 3.33% lower at 29 sen, giving the group a market capitalisation of RM112.64 million.

HPP shares have been on a declining trend in recent months and hit a record low of 28 sen on April 14. Year-to-date, the counter has fallen 31.76%.

From Jan 20, 2021, when the group was listed on the ACE Market with its initial public offering price of 36 sen, the company’s share price has dropped 19.44%.