1QFY22 CNP of RM7.4m came below our expectation (at 15%) but DPS of 1.5 sen is in line. QoQ, despite revenue rising on higher sales volume, margins dipped due to higher production costs. We expect top-line to sustain but are cautious on margins. We increase FY22E revenue by 5% but cut earnings by 16% after imputing higher production costs. We maintain FY23E earnings and DPS. Downgraded to MARKET PERFORM with lower TP of RM1.59 (from RM2.07) based on FY22 EPS of 14.5 sen at 11x PER.

Below expectation. 1QFY22 CNP of RM7.4m came below our expectation at 15% of our FY22 estimate. 1QFY22 dividend of 1.5 sen is within our estimate.

YoY, revenue rose by 31.8% on strong sales and higher ASP of products. However, CNP was down by 24.9% in tandem with PBT due to higher production costs impacted by geopolitical tension.

QoQ, revenue improved by 5.7%, thanks to higher sales volume. Nevertheless, PBT dipped by 34.7% as PBT margin decreased by 4.3ppt to 7%, mainly due to higher administrative and operational costs such as higher raw material costs, electricity cost (removal of electricity rebates), and freight costs. As a result, the group recorded a CNP of RM7.4m on a higher effective tax rate of 18% (vs. 4QFY21: 15%).

Outlook. We remain positive on BPPLAS’s top-line due to: (i) sustainable demand as its utilization rate is at an average of 70-75% with new capacity contribution from its 9th cast stretch film machine, and (ii) increase in manpower headcount. However, we are concerned about its margin, mainly due to: (i) higher production cost on the increase in labor and overhead costs, (ii) supply chain challenges, and (iii) elevated raw material cost. We expect resin prices to remain elevated at a higher price level until 1HCY22 on the back of: (i) unresolved Russia-Ukraine war, (ii) lockdown in China, and (iii) ongoing supply chain disruption. However, resin prices are showing signs of softening and we expect ASP to remain stable.

Post results, we increase FY22E top-line by 5% to factor in higher contribution from the 9th cast stretch film machine. However, we reduce FY22E CNP by 16% to RM40.8m (from RM48.5m) imputing volatile input cost and inflationary pressure, and we also lower FY22E DPS to 6.0 sen (from 8.0 sen), implying 4.0% yield. We remain our FY23E earnings forecast.

Downgraded to MARKET PERFORM with a lower TP of RM1.59 (from RM2.07) based on FY22E EPS of 14.5 sen (from 17.2 sen), implying an ascribed PER of 11x, which is above its 5-year mean of 8.0x. We believe BPPLAS deserves the valuation thanks to sustainable demand for its products.

Risks to our call include: (i) faster-than-expected ASP declines, (ii) lower than-expected export demand, (iii) foreign currency risk, and (iv) labour shortage.

Source: Kenanga Research - 24 May 2022