HPPHB’s 1HFY23 results disappointed due to weak sales to customers in the consumer electronics segment, though partially mitigated by improved operating efficiency and the absence of Covid-related costs as the pandemic came to an end. We foresee a stronger recovery in FY24. We cut FY23F and FY24F earnings by 9% and 1% but raise our TP by 15% to RM0.53 (from RM0.46) as we roll forward our valuation base year to FY24F (from FY23F). Maintain OUTPERFORM.
Missed expectations. 1HFY23 core net profit of RM4.5m disappointed, at only 34% of both our full-year forecast and the full-year consensus estimate. The key variance against our forecast came from weak sales to customers in the consumer electronics segment (which typically contributes to more than half of its total turnover).
Results’ highlights. YoY, 1HFY23 revenue only grew 3%, dragged down largely by weak sales to customers in the consumer electronics segment as mentioned, while we believe sales to customers in other segments such as sheath contraceptives, F&B and pharmaceuticals improved. However, 1HFY23 core net profit jump 42%, we believe on improved operating efficiency and the absence of Covid-related costs as the pandemic came to an end. QoQ, 2QFY23 core net profit plunged 89% but we are unperturbed as this was due to an RM2.4m ESOS charge to the P&L (which is non-cash in nature).
Outlook. We foresee a more promising FY24 for HPPHB on: (i) a recovery in demand from its customers in the consumer electronics space in line with the recovery in the global economy, (ii) sustained growth in demand from its customers in sheath contraceptives, F&B and pharmaceutical segments, and (iii) maiden contributions from its paper pulp moulding - a new product with a ready market, i.e. HPPHB’s existing customers. Recall, HPPHB acquired a factory with an area of c.20.6k sq ft for RM7.7m for the new business which will commence production in 2QCY23 with two lines. We expect this segment to contribute to the bottom line from 2HCY23.
Forecasts and TP. We cut FY23F and FY24F earnings by 9% and 1%, respectively, to reflect the soft patch in demand from customers in the consumer electronics segment. However, we raise our TP by 15% to RM0.53 (from RM0.46) as we roll forward our valuation base year to FY24F (from FY23F). We value HPPHB at 13x forward PER, at a premium to the average historical forward PER of 10x for the manufacturing sector largely to reflect HPPHB’s solid client base with prestigious names such as Customer D that speaks volume for its proven product and service quality. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).
Overall, we like HPPHB for: (i) the strong long-term growth prospects of its end-users, i.e. the consumer electronics, sheath contraceptives, F&B and pharmaceutical segments, (ii) its globally recognised G7 Master Colourspace certification that enables it to carve itself a strong footing in the supply chain of MNCs, providing design, multicolour and high resolution offset or flexographic printing solutions, and (iii) its strong customer base. Maintain OUTPERFORM.
Risks to our call include: (i) a slow recovery in the demand for consumer electronics sector; (ii) the volatility in the cost of inputs particularly paper pulp, and (iii) high customer concentration in a particular segment.
Source: Kenanga Research - 17 Jan 2023
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