BPPLAS’s 9MFY23 results met expectations. We see an uptick in orders primarily driven by the positive reception of its new premium offerings such as nano stretch film on growing demand for sustainable packaging solutions. These higher-margin products should help to mitigate cost pressures. We maintain our forecasts, TP of RM1.23 and MARKET PERFORM call.

Within expectations. Its 9MFY23 core net profit of RM23.7m met expectations at 71% and 73% of our full-year forecast and the full-year consensus estimate, respectively. BPPLAS declared DPS of 1.5 sen in 3QFY23, which is in line with our expectation, bringing cumulative YTD DPS to 4.5 sen (9MFY22: 4.0 sen).

Results highlights. YoY, its 9MFY23 revenue declined 12% primarily due to: (i) reduced ASP in tandem with falling resin cost, and (ii) softening demand for plastics packaging amidst global economic slowdown. Its core net profit dropped by a relatively smaller 5%, buoyed by improved margins arising from a better product mix with a greater proportion of highermargin products such as nano stretch film.

QoQ, its 3QFY23 revenue increased 6% thanks to: (i) improved orders for its new premium offerings from Europe and US (e.g. nano stretch film), (ii) restocking by customers, and (iii) seasonal factor, i.e. a pickup in demand ahead of the year-end festive season. However, its core net profit slipped 13% due to higher operating costs, particularly utilities. To recall, BPPLAS terminated its subscription to the Green Electricity Tariff (GET) program in August 2023. The decision was prompted by higher GET rate of 21.8 sen/kWh (from 3.7sen/kWh), compared to conventional ICPT surcharge of 17.0 sen/kWh. Hence, we expect there is an approximately 30% increase in monthly electricity costs.

Outlook. We remain cautious on the market demand for packaging materials in 2HFY23 despite 2H traditionally being the peak season, due to lingering uncertainties in the global economic recovery.

Nonetheless, we anticipate that BPPLAS is well-positioned to capitalize on the rising demand for sustainable packaging solutions. In line with its commitment to sustainability, the company continues to prioritise initiatives such as: (i) downgauging (i.e. making the film thinner without comprising quality), and (ii) use of recycled raw materials. It is hopeful for increased orders for its latest premium offerings, particularly nano stretch film from both European and US markets on the heels of its participation in an international trade fair in Europe in May 2023.

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. Reiterate 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 - 22 Nov 2023