HPPHB’s 1HFY24 results disappointed on higher input cost and weaker sales. We expect a stronger 2HFY24 on maiden contribution from its new high-margin recyclable paper pulp moulded packaging products. We cut our FY24-25F net profit forecasts by 25% and 11%, respectively, reduce our TP by 11% to RM0.64 (from RM0.72) but maintain our OUTPERFORM call.

Its 1HFY24 core net profit of RM2.4m came in at only 17% and 19% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from weaker sales and higher input cost.

Results’ highlights. YoY, HPPHB’s 1HFY24 revenue dropped 19% mainly due to weaker sales at its non-corrugated packaging (-27% YoY) and rigid box (-36% YoY), catering mainly to consumer electronics, sheath contraceptives, F&B and pharmaceuticals. Its core net profit fell by a steeper by 48% on high-cost inventory.

QoQ, its core net profit plunged 97%, weighed down by ESOS charge of RM1.3m (which was non-cash).

Outlook. We expect a stronger 2HFY24 on maiden contribution from its new high-margin recyclable paper pulp moulded packaging products, a substitute to similar Styrofoam packaging products.

The product is cost-effective and not subject to hefty environmental taxes (imposed on Styrofoam packaging) in various countries. We see a ready market for its new products from both existing and new customers given their recyclable attribute, which meets stringent EU environmental standards.

We also expect a recovery in orders, particularly from the E&E segment on restocking by customers and new product launches.

Forecasts. We cut our FY24-25F earnings forecasts by 25% and 11%, respectively, to reflect the soft patch in demand for its non-corrugated packaging products and higher input cost.

Valuations. Consequently, we reduce our TP by 11% to RM0.64 (from 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).

Investment case. We continue to like HPPHB for: (i) its 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, multi-colour and highresolution 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) volatility in the cost of inputs, particularly paper pulp, and (iii) high customer concentration in the consumer electronics segment.

Source: Kenanga Research - 19 Jan 2024