• MYR0.50 FV based on 12x FY24F (May) P/E. The recent recovery in orders and earnings are expected to persist in the mid-term, in tandem with lower inventory levels, new product launches, and diversion of manufacturing services out of China. With globally accredited quality certifications, we believe HPP Holdings’ future earnings will be propelled by its expansion plan and venture into the paper pulp moulded packaging business. Coupled with >6% FY23F dividend yield, its c.7.6x P/E is undemanding.

• Secured orders for paper pulp moulded packaging. The group intends to place 3-4 production lines comprising dry press, wet press, and food grade paper pulp moulded production lines. A dry press production line is expected to kick-start by Sep or Oct 2023, as HPP has received some orders from Customer CR and is in talks with potential new ones. Another existing E&E customer has also placed orders for its wet press paper pulp moulding with first delivery slated for Dec 2023 or Jan 2024. We see high demand for HPP’s recyclable paper pulp moulded packaging from existing E&E customers. We expect the capex spent on this new business, which commands a higher margin (>30%), to start contributing to topline growth from FY24 and breakeven to contribute to bottomline by 4QFY24.

• Clearer skies with the resumption of orders. Following the growth of the global condom and pharmaceutical markets, we expect HPP’s non- corrugated packaging to receive steady orders from its pharmaceutical and sheath contraceptive customers. The group is also receiving higher orders for its corrugated packaging, especially from Customers CR and A, and new customers for FY24 – mainly contributed by new product launches, lower inventory levels, and diversion of manufacturing services out of China. With growth in orders for the corrugated and non-corrugated paper packaging segments, improving utilisation can be expected, which will lead to better margins starting FY24 – in our view. Beyond this, we expect to see orders recovery from Sony and a potentially larger market share from existing E&E customers.

• Floor space expansion for facility streamlining. In 2023, HPP purchased another 41,000sq ft of land to replace the rented plant in Krubong – management expects the new plant to commence operations by 2024. Subsequently, the group will move some of the machineries to the new plant to focus on automation for gluing processes. In addition, it is looking to purchase one additional standard format machine with advanced features and one more rigid box production line into the new plant.

• Undemanding valuation. Coupled with its net cash position of MYR37.3m and decent dividend yield, we believe its c.7.6x FY24F P/E is undemanding when compared with the local packaging players. In line with the 1-year forward P/E of its peers, we ascribe a 12x P/E on FY24F EPS to derive a FV of MYR0.50. Key risks: Price fluctuation of raw materials, concentration risk in the consumer E&E industry, and operational risks.

Source: RHB Research - 4 Aug 2023