Making its debut on the ACE Market today, HPP Holdings Bhd (HPP) is a specialist of paper-based packaging with diversified presence in various end-user industries seeking to boost production capacity and widen customer base via its listing proceeds. Recommend BUY with a target price of RM0.50 based on 12x PER FY22 as per the closest industry players.

Established in year 1996, HPP has grown leaps and bound to a paper-based packaging specialist, involving in the printing and production of corrugated and non-corrugated packaging, brochures, leaflets, labels, paper bags as well as trading and production of rigid boxes. While its revenue is dominated in the booming consumer electrical and electronics (E&E) sector (63.3%), customers are all well-diversified in various industries such as sheath contraceptive, food and beverages (F&B) as well as pharmaceutical with sales contribution of 23.7%, 11.0% and 0.9% respectively in FY20. Having high colour quality printing facilities, it enables the group to maintain long term business relationship with reputable customers such as Sony EMCS (Malaysia), Beryl’s, Karex and Kotra Pharma. Presently, 72.4% of revenue is generated from local customers.

RM13m of the proceeds will be allocated for capital expenditure to acquire machines, including two additional standard format machines with advanced features. This will bring the total number of standard printing machines to seven, and to increase annual printing capacity by 20% to 103m pieces. The group intends to expand rigid box business by adding one more production line in the next six months, doubling the production capacity tapping on the rising demand for high end consumer E&E and F&B sectors. Hence, we expect margin of the segment to improve as the segment was driven by the sales from trading of rigid boxes over the past 2 years. Meanwhile, RM2m from the fund will be utilised for marketing initiatives, aiming to widen customer base in the global market, Northern and Southern Malaysia. RM7.8m will be used for repayment of bank borrowings with expected interest savings of approximately RM1.9m.

The group intends to distribute dividend based on at least 20% of payout ratio after listing. Balance sheet remains healthy with net cash positing post listing. Moving forward, FY21 financial results is expected to recover due to resumption of manufacturing activities and expecting a double-digit growth of 16% for net profit in FY22, on the back of higher orders from existing and potential new customers due to growing demand in the paper-based packaging product especially in the consumer E&E and F&B sectors.

Source: Rakuten Research - 20 Jan 2021