HPPHB’s 9MFY23 results disappointed due to weak sales in its consumer electronics segment, partially mitigated by improved operating efficiency and lower raw material cost. We cut our FY23F and FY24F earnings by 27% and 16%, respectively, (but still expect YoY improvement in FY24 underpinned by the recovery in the global economy). We lower our TP by 17% to RM0.44 (from RM0.53) but maintain our OUTPERFORM call.

Missed expectations. 9MFY23 core net profit of RM6.2m came in below expectations at only 50% and 45% of our full-year forecast and 45% of full-year consensus estimate, respectively. The key variance against our forecast came from weak sales in the consumer electronics segment.

Results’ highlights. YoY, 9MFY23 revenue declined by 4% mainly due to weaker sales at its corrugated packaging segment and rigid box segment (which supply mainly to customers in the consumer electronics space). However, 9MFY23 core net profit jumped 26%, we believe, on improved operating efficiency.

QoQ, 3QFY23 core net profit almost quadrupled despite a 21% drop in turnover, we believe, due to the decline in raw material cost and better cost efficiency.

Outlook. We foresee a more promising FY24 for HPPHB on: (i) a recovery in demand 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 segment - 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 (paper pulp moulded segment) which will commence production in 2HCY23 (delayed from 2QFY23) with two lines. We expect this paper pulp moulded segment to contribute to the bottom line from FY24.

Forecasts and TP. We cut FY23F/FY24F earnings by 27%/16%, to reflect softer demand from its customers in the consumer electronics segment on slowing global economy. Customers in the consumer electronics segment typically contribute to more than 50% of its total turnover.

Correspondingly, we reduce our TP by 17% to RM0.44 (from RM0.53) based on 13x FY24F 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).

We continue to 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 including Customer D. Maintain OUTPERFORM.

Risks to our call include: (i) a slow recovery in the global consumer electronics sector, (ii) the volatility in the cost of inputs particularly paper pulp, and (iii) high customer concentration in the consumer electronics segment.

Source: Kenanga Research - 25 Apr 2023