BPPLAS guided for a slow recovery in sales in 2HFY23 as the global economy remains soft, partially cushioned by restocking by end users, its shift towards higher-margin products such as premium stretch film and substantive enquiries on its products during a recent international trade fair that may translate to new orders in future. We maintain our forecasts, TP at RM1.23 and MARKET PERFORM call.

We came away from a recent engagement with BPPLAS feeling mixed about its near-term outlook. The key takeaways are as follows:

1. BPPLAS guided for a slow recovery in sales in 2HFY23 as the global economy remains soft. This will be partially cushioned by restocking by end users (who have depleted their inventories) and BPPLAS’s shift towards higher-margin products such as premium stretch film. Meanwhile, substantive enquiries on its products during a recent international trade fair in Germany may translate to orders from new customers in FY24.

2. BPPLAS’s margins will continue to come under pressure in 2HFY23 due to higher labour and energy costs. The higher labour cost stems from the upwards adjustment in the minimum wage last year, coupled with the reduction in the maximum weekly working hours to 45 (from 48) pursuant to the amendment of the Employment Act 1955 effective Jan 2023. Meanwhile, the full impact of the electricity tariff hike in Jan 2023 will be felt in 2HFY23 in the absence of an extension to the Green Electricity Tariff (GET) programme which expires in Jun 2023 (based on the latest information).

Recall, under the programme, electricity users are offered an exemption to the Imbalance Cost Pass-Through (ICPT) surcharge of 20 sen/kWh via a subscription charge of 3.7 sen/kWh (resulting in an effective savings of 16.3 sen/kWh). However, this offer to buy renewable energy is capped at 30% of the user’s total electricity consumption.

3. Meanwhile, its two blown film machines are on track to come online in 3QFY23 and 4QFY23, respectively, to meet the demand for stretch hood and shrink film. The two blown film machines will increase its nameplate capacity by 800 tonnes/month, bringing its total annual nameplate capacity for stretch and blown films to c.148k tonnes.

Forecasts. Maintained.

We maintain our TP of RM1.23 based on 9x FY24F PER, at a discount to the sector’s average historical PER of 13x to reflect BPPLAS’s relatively smaller market capitalisation and thin share liquidity. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (Page 4).

We like BPPLAS for: (i) its strong foothold in the Southeast Asia market which is expected to remain resilient despite the global economic uncertainties, (ii) its strong cash flows and balance sheet (a net cash position) that will enable it to weather downturns better, and (iii) its long term capacity expansion in high-margin premium stretch film and blown film products, which will enable it to capitalise on the next up cycle. However, its prospects over the immediate term are clouded by a slowdown in the global economy. Maintain MARKET PERFORM.

Risks to our call include: (i) sustained higher resin cost, (ii) reduced demand for packaging materials in the event of a sharp slowdown in the global economy, and (iii) labour shortages.

Source: Kenanga Research - 12 Jun 2023