HPPHB is rolling out high-margin paper pulp moulded products, an internal packaging solution which will complement its existing external packaging solution, i.e. printed boxes. Given the recyclable attribute of the new products, there is a strong and ready market from existing customers. We raise our FY24-25F earnings forecasts by 29% and 56%, respectively, lift our TP by 64% to RM0.72 (from RM0.44) and maintain our OUTPERFORM call.

We came away from a recent engagement with HPPHB feeling upbeat on its prospects, driven largely by its new environmentally-friendly paper pulp moulded products (commonly in the forms of a tray, small box, holder, square pot, etc). The key takeaways are as follows:

1. The group is embarking on major expansion. It is extending the floor space of its Plant 5 by 41k sq ft (RM6m) and building a new Plant 6 measuring 83k sq ft (RM15.7m). These expansion plans will boost its overall floor space by 77% to 285.2k sq ft by end-2023. The expanded floor space in Plant 5 will be used for value-added services to customers such as labelling, gluing, taping and folding. More importantly, Plant 6 will house four production lines of the new paper pulp moulded products, which are an internal packaging solution. Two lines each will produce “dry pressed” and “wet pressed” moulding. In “dry pressed” moulding, the pulp is directly heated or dried to remove moisture before it is shaped and the end product is commonly used in E&E products. Meanwhile, in “wet pressed” moulding, the pulp is dried and smoothed in a mould in the thermoforming process and the end-product is commonly used in home appliances (see Exhibit 1).

2. Paper pulp moulded packaging products will be the key earnings growth driver for HPPHB over the immediate term. Upon commencement of production from Sep 2023 to Jan 2024, in addition to external packaging solution, i.e. boxes, HPPHB is also able to provide internal packaging solution, i.e. paper pulp moulded products, to its customers. Most of its customers currently use Styrofoam for internal packaging (sourced from other packaging suppliers) which is not environmentally-friendly. HPPHB believes that they are very inclined to switch to recyclable paper pulp moulded products made from recycled paper and cupboard on rising environmental standards for packaging, especially for products heading to the EU market. More so, we understand that this substitute is more cost-effective as single-use styrofoam is subject to punitive environmental taxes in many countries. Thus far, it has secured four customers and in negotiation with another five across the consumer, pharmaceutical and E&E segments for the product.

3. Paper pulp moulded products command high margins. HPPHB guided for a net margin of 20% for dry pressed paper pulp moulded products and 30% for the more premium wet pressed paper pulp moulded products. These are significantly higher than a net margin of 10%-12% fetched by its external packaging products. As such, we forecast its blended net margin to improve from 11.5% in FY23 to 14.8% and 16.2% in FY24-25.

4. Meanwhile, it has seen orders for boxes picking up from the E&E segment, underpinned by restocking by existing customers (including reputable audio equipment maker Customer F), new product launches by its E&E customers (and hence, the demand for new boxes) and the onboarding of new customers.

Forecasts. We raise our FY24-25F net profit forecasts by 29% and 56%, respectively, to reflect: (i) contributions from the new paper pulp moulding segment, and (ii) stronger orders for the core external packaging products.

For FY24, we expect a soft 1H due to an expected recognition of RM1.2m ESOS expense in 2Q, but a strong 2H driven by the maiden contribution from the paper pulp moulding segment.

Coupled with the rolling forward of our valuation base year to FY25F (from FY24F), we lift our TP by 64% to RM0.72 (from RM0.44) based on an unchanged 13x PER, at a premium to the average historical forward PER of 10x for the manufacturing sector largely to reflect HPPHB’s niche strength in high-quality box printing and a strong client base comprising prestigious multi-national names. There are slight changes to our ESG markings (see ESG Update on Page 3) but the overall rating as appraised by us is unchanged at 3-star and hence there is no adjustment to our TP based on ESG (see Page 6).

We continue to like HPPHB for: (i) the strong long-term growth prospects i.e. in the consumer electronics, sheath contraceptives, F&B and pharmaceutical segments, (ii) its globally recognised G7 Master Colourspace certification that enables it to establish a strong footing in the supply chain of MNCs, providing design, multicolour and high-resolution offset or flexographic printing solutions, and (iii) its robust 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 - 21 Aug 2023