· Lacklustre performance. Public Packages Holding Berhad (PPHB) did not perform as anticipated since being recommended in our OR report in July last year with a Trading Buy call as its share price retreated 16.8% in the space of seven months. This is despite a rebound from a low of RM0.535 spurred by its 4Q14 core net profit surging >100% QoQ and YoY driven by higher market demand and lower manufacturing and operating expenses from the manufacturing division.

· Packaging segment. While we have no access to the management thus far, we understand from its annual report that the company has invested in a new digital printing machine to increase production capacity to enhance their capability in providing solutions to their clients. We expect the new machine to bring in additional c.RM5.0m revenue to the group. Moreover, it is seeking new opportunities through local or overseas joint-ventures in order to enhance their competitiveness and further expand their businesses and client base.

· Diversifying from packaging businesses. Recap from our previous report dated 22 July 2014; PPHB had proposed to venture into “hotel and commercial property leasing” to diversify its existing businesses. Its heritage hotel project is currently at restoration stage and targeted to begin operations in FY18. We reckon that this new development could contribute additional revenue of c.RM14m p.a. (assuming room rates of average RM400/night and 60% occupancy), which would provide the company strong operating cash flow going forward.

· Compelling valuations. We understand that rising energy cost and the shortage of workers are trimming the manufacturing sector’s profit margin, especially smaller players who have weaker pricing power and cost passthrough ability. M&A could be one of the strategies used in order to gain scalability and economies of scale. PPHB could be an attractive candidate for M&A given its stable earnings track record and attractive valuation of 6.8x Fwd PER which implies a 33% discount to the average M&A valuation of 10.1x. However, we view that M&A activity is unlikely at this juncture as PPHB is tightly held by the Koay family.

· Maintain fair value (FV) of RM0.98 but stock rating downgraded to NOT RATED from TRADING BUY previously as: (i) we continue to have no access to the group’s management which limit earnings visibility forecast on our end, and (ii) low liquidity and interest in the stock. The stock is currently trading at undemanding FY14 and FY15E PERs of 7.0x and 6.8x, respectively. Our FV is based on a Fwd. FY15E PER of 8.4x which is at a 20% discount to current FBMSC Fwd. PER valuation of 10.3x. The discount is for PPHB’s relatively smaller market cap at RM87m vs. the average FBMSC market cap of RM642m. 

Source: Kenanga