Well-established packaging company. Public Packages Holdings Berhad (“PPHB”) is a small-cap packaging supplier involved in developing, designing, printing and manufacturing services for paper packaging products. PPHB also manufactures point of purchase displays for consumer brands such as Maybelline, Energizer, Twisties and Fisher-Price. The Company has registered 23 consecutive years of profitability since its listing in 1991 with 5-year earnings CAGR of 27%. Key earnings drivers include the manufacturing and trading divisions which contributed 69% and 27% of PBT respectively. Going forward, we expect to see good CNP growth of 19% in FY14E and 17% in FY15E on better trading division prospects and new investment in digital printing equipment.

Undervalued. PPHB is currently trading at 8.6x-7.3x FY14-15E Forward PER which is at an 8% and 40% discount to its packaging peers estimated Fwd. PER of 9.3x and FBM Small Cap Index (FBMSC) Fwd. PER of 12.7x, respectively. Note that we derive the packaging peer average of 9.3x Fwd. PER by ascribing a 5% earnings growth on the FY13 EPS of each peer company due to lack of consensus forecast data. We believe this discount is not justifiable due to PPHB’s good growth prospects and strong profitability track record. Note that PPHB’s 1Q14 YoY earnings growth of 139% is much stronger than its packaging peer’s average of 65% YoY earnings growth.

M&A valuations reiterate value of PPHB. In the past 5 years, Japanese companies have been actively acquiring controlling stakes in Malaysian packaging companies (e.g. Oji Paper’s acquisition of GS Paper in Mar 2010 and United Kotak Bhd in Oct 2010). For the Japanese, we gather that they prefer to control the whole supply chain which enables better cost control; this came about when the Japanese Yen strengthened significantly, resulting in many Japanese investors buying overseas assets. Locally, we observe recent consolidation in this segment (e.g.: Scientex Bhd’s acquisition of GW Plastics Holdings Bhd in Oct 2012 and Can-One Bhd’s stake in Kian Joo Can Factory Bhd in Sep 2009) as packaging players are trying to capture market share. On average, the M&A valuations of acquired companies are 10.1x based on a range of 6.4x-12.0x Fwd. PER with a market cap range of RM67m- RM1.4b. Meanwhile, we also observe heavy accumulation of the stock as its average daily volume transacted has increased to 706k in June from 66k in May prior to the run-up from 3 June, which has driven share price up by 40% to 95sen. Note that we were unable to touch base with the company to get more clarity on its future direction. While we cannot verify whether PPHB is in talks or is a takeover target, we strongly believe that its valuations are backed by recent M&A activities. We estimate that the Company’s valuation should not be far off from the 10.1x average PER of its M&A peers, given its steady growth trajectory. However, PPHB’s current FY14E PER of 8.6x implies a 15% discount to the 10.1x M&A average.

Trading buy with a Target Price of RM1.21 based on Fwd. P/E of 9.3x on its FY15 EPS of 12.9 sen. Our Fwd. P/E of 9.3x is based on a 10% discount to current FBMSC Fwd. P/E valuation of 10.4x. Despite applying a conservative valuation due to PPHB’s relatively smaller market cap at RM100m vs. the average FBMSC market cap of RM721m, we are expecting a solid 34.6% total return (with upside of 34.6%; no dividend expectation which is in line with its peers)

Source: Kenanga