BPPLAS guided for slight improvement in demand in 2HFY23 amidst a challenging global environment. Nevertheless, it is sticking to its strategic expansion plan with emphasis on higher margin products such as premium stretch film and value-added technical products for blown PE films, which should drive long-term growth trajectory. We maintain our forecasts, TP of RM1.23 and MARKET PERFORM call.

We came away from a post-results engagement with BPPLAS feeling reassured and positive about its longer-term prospects. The key takeaways are as follows:

1. Slight improvement in 2HFY23. BPPLAS guided for slightly stronger 2HFY23 compared to 1H on higher sales volumes and ASPs. The anticipated increase in sales volume is due to slight improvement in demand, as well as better response for its new premium offerings, including premium stretch films. We believe it is premature to conclude that a sustainable recovery in demand is underway as this pick-up in business could be driven by one-off restocking activities. Nonetheless, the slight improvement in ASPs, driven by an uptick in resin prices, came in handy, helping to absorb the higher electricity cost. At present, its plant utilisation stands at about 50%, which is similar to 50%-60% in FY22.

2. Higher-margin products in focus. It will continue to optimise its product mix, focusing on higher-margin products like premium stretch films and value-added, technical products for blown PE films. Meanwhile, it remains committed to its sustainability initiatives with key focus on downgauging (i.e. making the film thinner), enhancing product recyclability and the use of recycled raw materials.

3. Expansion in capacity and product range. BPPLAS’s FY24F top line will be fuelled by a 7% increase in its annual nameplate capacity to 148k MT in FY24F with the commissioning of two new co-extrusion blown film machines with a combined production capacity of 800 MT/month in mid-FY24 (see table on Page 2 for composition of its fleet of machines). In addition, its top line expansion will also be driven by new products such as the stretch hood (commonly used to encase a palletised load or a stack of products, such as building materials and F&B like canned and bottled drinks, to protect the goods, especially from outdoor conditions).

4. Operational streamlining is ongoing. BPPLAS is reorganising its production floor following the acquisition of a new factory (Plant 3) in Dec 2022. The renovation of this new factory is expected to be completed by end-FY23. BPPLAS will use it as warehouse as well as to house certain old machines which will be relocated from Plant 1 and Plant 2, to optimise the overall workflow.

Forecasts. Maintained.

We also maintain 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 - 15 Sept 2023