Results Report

YTD 3Q FY17 revenue decreased 0.2% vs YTD 3Q FY16, whilst net profits decreased 32.1% over the same period. The decline in PAT is mainly due to higher resin prices and increases in production costs. Sequential operating margins rose to 4.2% vs 2.9% in 2Q 2017. YTD 3Q 2017 operating margins came in at 4.4% vs 7.5% YTD 2Q 2016. Prices for resins remain elevated, and a full recovery in margins may take another two quarters. Production and packaging costs have also in-creased this year. The weaker USD has also resulted in lower revenue, as about 76% of revenues are earned outside Malaysia. Management indicates that trading conditions will remain challenging over the next few quarters. See page two for more details.

Investment Risks

Risks to our recommendation and target price include: i) a stronger USDMYR exchange rate, ii) an increase in resin prices and production costs, and iii) a sharp slowdown in the general level of economic activity in Asia, Middle East and Europe. Numerous shutdowns of petrol-chemi-cal plants worldwide, particularly in Asia resulted in supply shortages in 2017, resulting in higher raw material prices of ethylene and polyethylene. 

Recommendation

We upgrade our recommendation on BP Plastics Holding Berhad ("BPP") to BUY whilst maintaining our fair value estimate at MYR 1.30. Looking ahead, average ROE is likely to be maintained at levels of 8-10%, whilst P-BV stands on 1.6x trailing book value and 1.3x current year book value. Importantly, the company has a very clean balance sheet.  Total export sales is around 76% of total sales, with about 63% of sales in USD, 20% in MYR, 10% in SGD and remaining in EUR & JPY. The company has a dividend policy of paying out a minimum of 40% from its net profit. Given the weaker profit outlook, we have reduced our esti-mated dividend payments for FY 17 and FY 18. At current prices how-ever, the prospective dividend yield is likely to remain above 4.5%.

Company Profile

BP Plastics Holding Bhd (BPPLAS) is an investment holding and provision of management services company. The principal activities of the Com-pany, through its subsidiaries is manufacturing and trading of plastic products. Its subsidiaries include BP Plastics Sdn Bhd, BP Packaging Sdn Bhd, BP Packaging Sdn Bhd and Baoman Rubber Limited. On June 10, 2010, the Company acquired 100% interest in BPPlas Plantation Sdn. Bhd. (BPPlas Plantation). On October 5, 2010, BPPLAS incorporated a wholly owned subsidiary, Baoman Rubber Limited (Baoman).

Source: Wilson & York Securities Research - 28 Nov 2017