■ HPP’s 1HFY5/23 core net profit of RM6.5m (-0.2% yoy) was within both our expectation and Bloomberg consensus full-year estimate at 47.7%.
■ We expect HPP’s earnings momentum in 2HFY5/23F to be stronger hoh due to seasonality factors and demand recovery from its E&E customer segment.
■ Retain Add with an unchanged TP of RM0.55 (15x CY23F P/E, its historical mean since listing), with a robust 3-year EPS CAGR of 22.6% (FY22-25F).

1HFY5/23 core net profit of RM6.5m was within our expectations

HPP Holdings Bhd’s (HPP) 2QFY5/23 core net profit (CNP) came in at RM2.5m (-45.6% yoy), bringing 1HFY23 CNP to RM6.5m (-0.2% yoy). This was within both our expectation and Bloomberg consensus full-year FY5/23F estimate at 47.7%. Note that we exclude share-based payments in our CNP calculations of RM2.4m in 2QFY23 (2QFY22: RM3.3m). The lower 2QFY23 CNP was mainly attributable to lower sales (-16.5% you), primarily from its higher-margin corrugated packaging (-62.6% yoy) and manufacturing of rigid boxes (-41.7% yoy) but mitigated by higher sales of non-corrugated packaging (+37.8% yoy) and others (+32.6% yoy). As a result, 2QFY23 GP margin (excluding share-based payments) fell to 25.4% (-3.7% pts yoy). HPP declared a dividend of 0.75 sen/share (44.5% dividend payout), in line with our expectations.

Demand for its non-corrugated packaging remained robust

HPP’s 1HFY23 revenue increased by 3.4% yoy, mainly driven by sales derived from its non-corrugated packaging (57.7% of 1HFY23 revenue) segment, which grew to RM26.2m (+55.4% yoy), indicating continued strong order flow from the sheath contraceptive sector, in our view. Thus, the non-corrugated packaging segment’s sales as a percentage of total revenue reached its highest level since 1QFY21 (33.9%) of 61.2% in 2QFY23. 1HFY23 GP margin (excluding share-based payment) grew to 28.3% (+0.8% pts yoy). On a qoq basis, 2QFY23 revenue and CNP declined 11.6% and 37.8%, respectively, given an unfavourable sales mix as sales from its higher-margin corrugated packaging segment dropped 44.4% qoq to RM3.7m, partially due to seasonality factors.

A stronger 2HFY5/23F ahead on recovery of its E&E segment

We expect HPP to post stronger earnings in 2HFY23F hoh, primarily premised on I) demand recovery for its higher-margin corrugated packaging (mostly catering to the E&E sector), leading to a better product mix, ii) greater economies of scale from higher utilisation rate on increased sales demand, iii) higher operating efficiency on better cost control, and iv) seasonality as we understand that, pre-pandemic, the second half of the financial year is typically stronger on year-end, Christmas and New Year festive sales.

Reiterate Add with a TP of RM0.55; a recovery play

We retain our Add call on HPP with a TP of RM0.55 (15x CY23F P/E, its historical mean since listing). We also keep our FY23-25F earnings estimates intact as results were within expectations. We like HPP for its i) robust 3-year EPS CAGR of 22.6% (FY22-25F), ii) decent dividend yield of 3.5% (FY23-25F), and iii) undemanding valuation, as it currently trades at 11.7x CY23F P/E, a 22.0% discount to its historical mean since listing.

Source: CGS-CIMB Research - 17 Jan 2023