We initiate coverage on BPPLAS with an OUTPERFORM rating and TP of RM2.50. BPPLAS is a key Polyethylene (PE) film manufacturer in Asia that produces premium stretch film and customized packaging film. We are bullish on BPPLAS for: (i) robust demand from export and local markets, and (ii) catalysts for both near- and long-term margin expansions. We also like BPPLAS for its attractive 5.4% dividend yield. We estimate FY21E and FY22E net profits of RM36.1m (YoY +22.4%) and RM39.4m (YoY +9%), respectively. Our TP is based on 13x PER on FY21E EPS of 19.2 sen.

Robust demand. BPPLAS recorded stronger growth in sales volume in 1QFY21 (+13% QoQ) compared to 4QFY20 (+2.8% QoQ) mainly driven by orders from existing customers in both export and local markets. That said, BPPLAS is gaining market share from its competitors. We understand that BPPLAS is able to cater to extra orders from customers with its average utilization rate of 75%, which is near 80%, upon which BPPLAS will expand capacity to continue catering to the robust demand. BPPLAS has budgeted capex of RM35.6m for FY21/FY22 to finance: (i) the acquisition of its 9th cast stretch film machine, and (ii) expansion of blown film capacity. The 9th cast stretch film machine will help to increase the cast stretch film production by 10%, to a total capacity to 120,000 MT per year.

Near-term margin boost. Despite tight resin supply and high resin costs in 4QCY20 and 1QCY21 caused by supply chain disruptions, BPPLAS was able to secure a stable supply of resins from various suppliers. Like its peers, BPPLAS has also raised its ASPs in tandem with the spike in resin prices. Despite the recent falling resin costs, BPPLAS’ ASPs remains elevated at the high levels seen in March 2021. Therefore, we expect BPPLAS to show margin expansion in 2QFY21 (results to be announced in Aug 2021).

Long-term margin boost. ASPs will gradually fall and eventually normalise after resin prices stabilise to a lower level. However, BPPLAS has manufacturing specialities in premium stretch film and customized PE blown film based on customers’ requirements; thus, ASPs for these products tend to be sticky downwards. To expand its premium stretch film production capacity, BPPLAS will acquire its 9th cast stretch film machine (begins production in FY22). Thus, BPPLAS will be able to better defend its elevated margin with a portfolio of higher margin products. BPPLAS commands strong EBIT margins of about 12% vs. 10.1% for TGUAN and 9.8% for SCIENTX’s manufacturing segment, most likely due to: (i) better operational cost efficiencies as BPPLAS’ opex at 5.5% of revenue (in FY20) is lower than its peers, and (ii) better product mix.

Attractive dividend yield. BPPLAS is in a strong net cash position, when coupled with its ability to consistently generate healthy cash flows allow sustained dividend payouts. BPPLAS has consistently paid dividends of 4.0-8.0 sen from 2016 to 2020, with a payout ratio above 50% of net income. Therefore, we are positive that BPPLAS will continue to pay dividends of at least 8.0 sen for FY21. We are expecting DPS of 9.0 sen for both FY21 and FY22, representing yields of 5.5%.

Initiate with OUTPERFORM rating and Target Price of RM2.50, based on FY21E PER of 13x (+1.0SD of its 5-year mean of 9x). Our targeted PER of 13x is based on a 7% discount to peer TGUAN’s ascribed PER of 14x and a 28% discount to peer SLP’s ascribed PER of 18x.This discount is applied due to (i) weaker earnings growth relative to SLP and (ii) relative smaller size compared to TGUAN. TGUAN also commands a higher PER for its more aggressive long term expansion growth plans compared to BPPLAS. However, we think BPPLAS is grossly undervalued given: (i) the strong demand growth from export and local markets, (ii) solid balance sheet with cash per share of RM0.41 (as of March 2021), (iii) its ability to pass on higher resin costs, and (iv) better margin product mix. BPPLAS also offer attractive dividend yield of 5.5%, which is above the industry average of 2.5%.

Risks to our call include: (i) higher-than-expected resin cost, (ii) labour shortage, and (iii) strengthening of the Ringgit.

Investment Merits

Sustaining existing customers amidst the pandemic. We understand that in 1QCY21, BPPLAS’s sales quantity has increased 13% from 4QFY20, by sustaining orders from existing customers in Japan and locally. We suspect that this is partially due to subdued competition as we would not be surprised if smaller competitors have ceased operations in light of lockdown-induced production halts and sky-high resin costs, potentially culminating in cash flow problems for the weaker players. Moving forward, with a war-chest to expand its production capacity and ability to weather volatile resin costs, we believe BPPLAS will be able to gain greater market share from smaller competitors.

Capacity expansion. BPPLAS has 29 machines currently (8 cast stretch machines and 21 blown film machines) with a total capacity of 102,000 MT/year in FY20/FY21 with an average utilization rate of 75% (current utilisation rate: 60-70%). BPPLAS is investing a total capex ofRM35.6m for both FY21/FY22, and with a strong net cash position of RM84.1m in FY20, BPPLAS will be funding the said capex with its internally generated cash. We estimate c.70% of the capex will be utilized in FY21 to acquire the 9th cast stretch machine, which will increase its total capacity from 102,000 MT/ year to 120,000 MT/year. We estimate that production will start in FY22. Accounting for the greater capacity, we are assuming BPPLAS’s utilization rate to range between 65-70% in FY22. The objective of expanding capacity is to meet more demand as BPPLAS is gaining market share in the export market.

Near- and long-term catalysts to boost margins. We foresee that, over the long term, BPPLAS will expand their margins by: (i) pursuing growth in high margin products, and (ii) achieving higher operational efficiencies. BPPLAS has two main divisions – Industrial Packaging Division (Blown Film) and Stretch Film Division. BPPLAS’ total production is 75% cast stretch films and 25% blown film. Currently, c.40% of its stretch film production consist of premium stretch films. We believe that, with their upcoming 9th cast stretch film machine, premium stretch films will make up an increasingly larger portion of their total revenue. As BPPLAS’ customised blown packaging film and premium stretch film are considered high-margin products, where the latter commands 20- 30% higher selling prices over conventional stretch film, the larger portion of said high-margin products of its total revenue will lift overall margins. Moreover, given that these products are client-specific in nature and have more stringent quality requirements, their selling prices tend to be sticky downwards, and with greater customer loyalty. Furthermore, the Group is also looking to lower operating cost (currently 5.5% of revenue) by striving to be more operationally efficient. Thus, we believe both improved product mix and operational cost efficiencies should provide BPPLAS sustainable long-term earnings growth impetus. In the near term, with its ASPs at elevated levels and falling resin costs (-20% from March 2021), we are expecting margin expansion in its 2QFY21.

Net cash position enables generous dividend payouts. BPPLAS has a robust balance sheet with no borrowings and a cash holding of RM84.1m. Given the strong net cash position, BPPLAS will be able to fund its FY21/FY22 capex of RM35.6m and dividend payment of c.RM16.9m for FY21. BPPLAS has a dividend policy to distribute a minimum of 40% of its net income. Over the past 5 years, BPPLAS has consistently surpassed the policy with payouts ranging between 51% and 84%. The Group had been giving out DPS of 4.0-8.0 sen with a 5-year average dividend payout ratio of 58.3%. Moving forward, we are assuming dividend payout ratios of 47% and 43% for FY21 and FY22, respectively, implying DPS of 9.0 sen for each year and yield of 5.5%.

Source: Kenanga Research - 12 Jul 2021