BPPLAS’s 1HFY24 results met our expectations. Despite an 8% revenue growth, its 1HFY24 core net profit eased 1% YoY as rising operating costs more than offset the increase in sales volume for plastic packaging. While market demand remains sluggish, the company is focusing on expanding its product range with an emphasis on higher-margin products to mitigate cost pressures which should flow into 2025 earnings. While maintaining our forecast and TP of RM1.42, our call is upgraded to OUTPERFORM (from MARKET PERFORM) following recent price weakness.

BPPLAS’s 1HFY24 core net profit of RM15.9m met expectations at 47%of our full-year forecast but a miss at 44% on full-year consensus estimate. It also declared DPS of 1.5 sen in 2QFY24 (consistent with 2QFY23), on track to meet our full-year forecast of 6.5 sen.

YoY, its 1HFY24 top line rose by 8% fueled primarily by stronger exports, especially to Asian countries (+11%). However, its core net profit dipped marginally by 1% due to higher production costs, such as utilities and depreciation, but also the absence of exchange gain in 1HFY23.To recap, BPPLAS terminated its subscription to the Green Electricity Tariff (GET) program in Aug 2023. The decision was prompted by higher GET rate of 21.8 sen/kWh (from 3.7 sen/kWh), compared to conventional ICPT surcharge of 17.0 sen/kWh in 2HCY23. At present, the GET rate stands at 20 sen/kWh, which remains above the current ICPT surcharge of 16 sen/kWh.

QoQ, its 2QFY24 turnover declined 3% due to reduced local demand and fewer orders from outside Asia. Demand within Asian countries remained resilient (+4% QoQ). Nevertheless, its core net profit improved 14%, thanks to lower effective tax rate from reinvestment allowance claimed.

Outlook. The demand for plastic packaging is expected to remain flat in the near term, due to slow global economic recovery and relatively low resin prices, leading to a lack of urgency to stock up among buyers. However, we believe BPPLAS could grow its sales with the launch of: (i) new stretch hood product (successfully tested in 1HCY24), and (ii) new blown film packaging film product for the F&B sector, which is on track to come online in 4QCY24. These higher-margin products, along with premium-grade stretch film, should help cushion the impact of rising costs and would likely form >30% of sales mix over the next few years. In addition, Malaysian players including BPPLAS, backed by lower cost structure, are also well positioned to gain market shares in the global market from their overseas peers.

Forecasts. Maintained.

Valuations. We also keep our TP of RM1.42 based on 10x FY25F 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).

Investment case. We like BPPLAS for its: (i) strong foothold in the SE Asia market which is expected to remain resilient despite global economic uncertainties, and (ii) its expansion plans especially production capacity for sustainable packaging products such as nano stretch film, backed by a strong balance sheet that is in a net cash position. A potential re-rating catalyst could be the favourable market reception of its new high-margin products such as stretch hood and new blown film packaging film product, both coming in from 2HFY24. We see potential value emerging given the recent price weakness.Hence, we upgrade the stock to OUTPERFORM from MARKET PERFORM.

Risks to our call include: (i) reduced demand for packaging materials due to an extended global economic downturn, (ii) rise in freight costs, and (iii) adverse fluctuations in the foreign exchange market.

Source: Kenanga Research - 28 Aug 2024