BPPLAS’s 1HFY23 results met expectations. 1HFY23 core net profit dropped 20% YoY due to lower sales locally and exports, coupled with higher labour and utility costs. The outlook for the packaging sector is subdued amidst global economic uncertainty, partially mitigated by demand from restocking. We maintain our forecasts, TP of RM1.23 and MARKET PERFORM call.

Within expectations. 1HFY23 core net profit of RM16.1m met expectations at 48% of our full-year forecast and 51% of the full-year consensus estimate.

Results highlights. YoY, 1HFY23 revenue dropped 16% largely due to lower sales volume in the local market and reduced exports to regional markets, as well as a softer ASP on lower resin cost. Core net profit dropped by a larger 20% largely due to higher labour and utility costs.

On a QoQ basis, 2QFY23 revenue slipped 6% due to soft demand for plastic packaging amidst global economic slowdown. However, core net profit increased 16% thanks to: (i) better product mix with more higher margin products such as premium-grade stretch films, value-added blown films as well as form-fill-seal (FFS) films, and (ii) lower resin cost.

Outlook. We remain cautious on the market demand for packaging materials in 2HFY23, largely due to the uncertainties surrounding global economic recovery. However, we anticipate that the situation will gradually improve in early FY24 as customers begin replenishing their inventories, which is in line with BPPLAS’ guidance. More importantly, underlying demand for various consumer and industrial goods is likely to stay healthy due to packaging requirements especially for transportation and storage purposes. We also understand that BPPLAS’ two new blown film machines are on track to be commissioned by end-FY23 and hence is well positioned to capture any potential growth in demand in the future.

Meanwhile, BPPLAS is facing c.30% increase in monthly electricity costs starting from August 2023, after terminating its subscription to the Green Electricity Tariff (GET) program. The reason that the company decided to discontinue is because of higher GET rate of 21.8 sen/kWh (from 3.7 sen/kWh), compared to conventional ICPT surcharge of 17.0 sen/kWh. However, the impact on overall profits is minimal, as electricity costs only account for less than 5% of total costs. The push towards higher margin product mix should further reduce the impact of this increase in GET tariff.

Forecasts. Maintained.

We also keep our TP of RM1.23 based on 9x FY24F PER, at a discount to the sector’s average historical forward PER of 13x, largely to reflect BPPLAS’ 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 (see Page 4).

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

Risks to our call include: (i) a sudden surge in resin prices, (ii) reduced demand for packaging materials due to an extended global economic slowdown, and (iii) labour shortages.

Source: Kenanga Research - 23 Aug 2023