- 9M14 earnings slightly below expectations. Public Packages Holdings (PPHB)’s 9M14 Core Net Profit (CNP*) of RM8.8m made up 72% of our FY14 estimate of RM12.2m. As PPHB’s 9M14 earnings historically made up 83%-92% of full-year earnings in the last 3 years, we deem the results as slightly below expectations. We believe that 2Q-3Q earnings tend to be seasonally stronger as customers place their orders prior to the festive months in Dec-Feb.

- Weaker earnings QoQ and YoY. 3Q14 earnings declined 30% QoQ and 42% YoY to RM2.0m on lower-than-expected revenue due to slower market demand in the manufacturing division which produces cartons, packing materials and gift boxes.

- FY14-15E CNP trimmed to RM10.6m-RM12.8m. We revise our FY14-FY15E CNP lower by 13-10% to RM10.6m-RM12.8m. We have now lowered our FY14-FY15E revenue assumption by 5%-6% to RM164.5m-RM177.8m. This is to reflect the decline in demand arising from the slower domestic consumption outlook. However we believe earnings should remain resilient in the packaging industry as seen by PPHB’s track record of consistent profitability in the last 23 years of its listing.

- Still undervalued. PPHB is currently trading at 7.9x to Fwd. FY14E PER which implies a 5% discount to its packaging peers’ estimated Fwd. PER of 8.3x. We derive the packaging peers’ average of 8.3x Fwd PER by ascribing a 5% earnings growth on the FY13 EPS of each peer company due to lack of consensus forecast data. Furthermore, PPHB trades at a 31% discount to the FBM Small Cap Index (FBMSC)’s 11.5x Fwd. FY14 PER. We believe this discount is not justifiable due to PPHB’s good growth prospects and strong profit track record.

- Attractive M&A valuations. Recall in our previous report, we had highlighted that the Malaysian packaging industry is in a consolidation stage with both Japanese and local companies actively acquiring controlling stakes in Malaysian companies due to: (i) preference to control the entire supply chain which enables better cost control and (ii) packaging players attempting to capture additional market share. We reiterate our view that the company’s valuation should not be far off from the 10.1x average PER of its M&A peers, given its steady earnings pattern. However, PPHB’s current 7.9x Fwd PER implies a 22% discount to the average M&A valuation of 10.1x which could be a sweetener for potential suitors.

- Trading buy with a reduced Fair Value (FV) of RM0.98 against RM1.21 previously. The main rationale for the lower FV is due to the de-rating of small cap stock valuations where we saw the FBMSC Fwd PER valuation dropping from 10.4x or by 11% to 9.3x. We also apply a 10% discount on FBMSC Fwd PER due to PPHB’s relatively smaller market cap at RM84m vs the average FBMSC market cap of RM663m. Hence, our FV is based on a lower Fwd. FY15E PER of 8.4x (from 9.4x previously) on FY15E EPS of 11.6 sen (from 12.9 sen previously). Despite the lower FV, we maintain our Trading Buy recommendation due to PPHB’s stable earnings (profitable in the past 23 years) and strong possibility of M&A in view of its current valuation which is at a 22% discount to 10.1x M&A average. At this level, we are expecting 28% total return (with upside of 28%; no dividend expectations which is in line with its peers).

Source: Kenanga