HPPHB’s 1QFY24 results disappointed in the absence of a strong pick-up in orders and higher input cost. We are more inclined to look beyond a weak 1HFY24, expecting an earnings boost over the near term from its new high-margin paper pulp moulded packaging products. We cut our FY24F earnings but maintain that of FY25F. We also keep our TP of RM0.72 (which is based on FY25F numbers) and OUTPERFORM call.

Below expectation. Its 1QFY24 core net profit of RM2.3m disappointed, coming in at only 14% and 16% of our full-year forecast and the full-year consensus estimate, respectively. The variances against our forecast came largely from: (i) a weaker-than-expected pickup in orders, and (ii) higher-than-expected input cost.

Results’ highlights. YoY, HPPHB’s 1QFY24 revenue dropped by 21% due to lower sales across the board, i.e. corrugated packaging products (-30% YoY), non-corrugated packaging products (-14% YoY) and rigid boxes (-43% YoY), especially from customers in the E&E, sheath contraceptive and F&B industries. Hit by higher input costs, its core net profit plunged by a steeper 44%.

QoQ, its revenue inched up 1%. A significant rebound in the top line of corrugated packaging products (+55%) driven by a pickup in orders from customers in the E&E space, was offset by lower sales from noncorrugated packaging products (-8%) and rigid boxes (-16%) which key customers are in the production of sheath contraceptives and pharmaceutical products. Similarly, its core net profit dropped 26% due to higher input costs.

Outlook. We are more inclined to look beyond these weak 1QFY24 numbers, as well 2QFY24’s (on expected recognition of RM1.2m ESOS expenses). An earnings boost over the near term is expected from its new high-margin paper pulp moulded packaging products, a substitute to similar Styrofoam packaging products.

This alternative to Styrofoam is made of eco-friendly recycled materials. It is also cost-effective free from the hefty environmental taxes imposed on Styrofoam packaging in various countries. There is a strong and ready market for the new products from both existing and new customers given their recyclable attribute, which meets stringent EU environmental standards and ride on the rising global ESG trend. Meanwhile, we anticipate a demand recovery from its customers in the E&E space as they restock their inventory levels, coupled with the introduction of a new product by a key customer.

Forecasts. We cut our FY24F net profit by 16% to reflect softer demand for its non-corrugated packaging products and higher input cost, while maintaining our FY25F numbers.

However, we maintain our TP of RM0.72 based on an unchanged 13x FY25F 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-nationals. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Source: Kenanga Research - 20 Oct 2023