BPPLAS’s 1HFY22 results met our expectations but beat consensus estimates. We roll forward our valuation base year to FY23F to better reflect its growth potential. Over the immediate term, its growth will be driven by the commissioning of its tenth cast stretch film line in 4QCY22. It has also earmarked two coex blown film lines to strengthen the production of food packaging and shipping and logistics packaging film. Our TP is raised by 24% to RM1.63 (from RM1.31) based on 9x FY23F PER. Upgrade to OUTPERFORM from MARKET PERFORM.

Within expectations.1HFY22 core profit of RM20.1m came within our forecast at 49% of our full-year forecast but beat market expectations at 58% of the full-year consensus estimates.

1HFY22 topline grew by 29.9% lifted by:(i) higher sales volume underpinned by new capacity, i.e. the commissioning of its ninth cast stretch film line; and (ii) higher ASPs (in tandem with higher cost of input resin). However, 1HFY22 net profit contracted 18.5% as it could not immediately pass on the higher resin cost, coupled with a higher wage bill (due to the hike in the minimum wage) and higher freight cost on prolonged global supply chain disruptions. QoQ, 2QFY22 net profit rose by 71.6% due to cost pass-through by higher ASP, and better products mix.

Forecasts. Maintained.

Outlook. BPPLAS’s topline has thus far been spared the demand and labour issues (that have affected some of its peers), as manifested in its stable utilisation rate at an average of 65-70%. Over the immediate term, its growth will be driven by the commissioning of its tenth cast stretch film line in 4QCY22 (and it is confident that the line will be fully utilized within FY23). It has also earmarked coex blown film lines to strengthen the production of food packaging and shipping and logistics packaging film.

Meanwhile, its ASPs are likely to be sticky to the downside despite resin prices having softened c.10-12% YTD, resulting in better margins, albeit temporarily.

We roll forward our valuation base year to FY23F to better reflect its growth potential driven by: (i) capacity expansion which increase premium products capacity that fetch better margins, and (ii) sustainable demand. Our TP is raised by 24% to RM1.63 (from RM1.31) based on 9x FY23F PER, at a slight discount to peers’ average forward PER of 9.3x largely to reflect BPPLAS’s relatively smaller market cap and thin share liquidity. There is no adjustment to our TP based on its 3-star ESG rating as appraised by us. Upgrade rating to OUTPERFORM from MARKET PERFORM.

Risks to our call include: (i) sustained higher resin cost, (ii) recovery in demand for packaging materials from the pandemic cut short by a global recession, and (iii) prolonged labour shortages.

Source: Kenanga Research - 16 Aug 2022