HPPHB’s FY24 results beat expectations. Nonetheless, its FY24 core net profit fell 56% YoY on weak orders and higher operating costs. Its outlook should improve in FY25, judging from early signs of recovery in terms of orders from the electronic and electrical (E&E) segment. We maintain our forecasts but raise our TP by 22% to RM0.39 (from RM0.32). Maintain MARKET PERFORM.

Above expectations. Its FY24 core net profit of RM4.1m beat our forecast and consensus estimate by 32% and 25%, respectively. The variance against our forecast came largely from better-than-expected sales volume from the E&E segment in 4QFY24 and lower operating costs.

YoY, its FY24 revenue dropped 15%, weighed down by subdued performance from non-corrugated packaging (-30% YoY) and the rigid box (-16% YoY) segments, partially cushioned by corrugated packaging (+19% YoY). We believe its non-corrugated packaging, the largest revenue contributor, suffered from weak orders from the consumer E&E and F&B segments.

Its core net profit plunged by a steeper 56% on higher operating costs due to start-up costs at the new paper pulp moulded packaging business and generally sub-optimum utilisation resulting in loss of economies of scale.

QoQ, it returned to the black in 4QFY24 driven by a higher sales volume to the consumer E&E and sheath contraceptive sectors, coupled with an improved product margin mix.

Outlook. HPPHB is not short of earnings drivers such as: (i) generally higher paper product prices globally of late that should lift its ASPs, (ii) the introduction of its new high-margin recyclable paper pulp moulded packaging products, and (iii) a pick-up in orders, particularly from clients in the E&E segment on restocking and new product launches. We believe the consumer E&E segment has bottomed out and is showing early signs of recovery.

Forecasts. We maintain our FY25F forecasts while introducing FY26F number.

Valuations. However, we raise our TP by 22% to RM0.39 (from RM0.32) as we roll forward our valuation base year to FY26F from CY25F, based on an unchanged 13x 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 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 high-resolution offset or flexographic printing solutions, (ii) its strong customer base including Customer D, and (iii) its new recyclable paper pulp moulded packaging products, a substitute to Styrofoam packaging products, that comply with stringent EU environmental standards and are not subject to hefty environmental taxes imposed on Styrofoam packaging products in various countries. However, these could only become more meaningful if HPPHB could deliver more consistent profits. Maintain MARKET PERFORM.

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 - 22 Jul 2024