Summary

• BP Plastics Holding Bhd’s (BPPLAS) 1Q22 net profit declined 22.1% YoY to RM7.5m. The results came in below expectations, amounting to 15.6% of our full year forecast at RM48.0m and 15.5% of consensus forecast at RM48.5m. Key deviations were mainly due to the elevated production costs arising from the unexpected Russia-Ukraine conflicts started in February 2022. Meanwhile, a first interim dividend of 1.5 sen per share, payable on 7th July 2022 was declared.

• QoQ, core net profit shrank -36.7% as margins were being hit due to a delay in passing on the elevated resin price and high freight rates, as well as the removal of Imbalance Cost Pass-Through electricity rebates.

• Resin prices have been surging since mid-January 2022 on the back of (i) continued strong demand, (ii) limited supplies along with soaring energy feedstock costs, (iii) supply chain issues as well as (iv) unresolved Ukraine-Russia tension. While the resin prices saw a small drop in the past week, we believe costs will remain elevated given the high energy and transportation costs persist.

• Production wise, capacity remained strong at 10kMT per month or 120kMT p.a. produced by 9 Cast Stretch Film machines. We look forward to the commissioning of the 10th Cast Stretch Film machine by end of FY22 which is expected to boost the production capacity to 11kMT per month or 132kMT p.a. The latest machine installed in December 2021 and the upcoming machine are supplemented with Nano-technology which should enable further product innovation and differentiation.

• BPPLAS’s strategic investment plans to re-invest into new technologies are supported by its strong financial position. Net cash position stood at RM66.0m as at 1Q22, while net cash per share recorded at 23.4 sen.

• Moving forward, we believe the plastic packaging demand should remain robust amid Malaysia’s transition into endemic phase and reopening of business activities. Nevertheless, challenges remain given the volatile commodity price, supply chain disruptions and labour shortage issues. BPPLAS has been putting effort in recruiting and upskilling the talents, as well as optimising its production costs.

Valuation & Recommendation

• As the core net profit came in below our expectations, we trimmed our FY22f-FY23f earnings forecast by 38.1% and 33.7% to RM29.7m and RM32.9m, respectively. The earnings forecasts take into account the capacity coming from the 10th Cast Stretch Film machine, as well as the lower margin stemming from the elevated production cost.

• Subsequently, we downgrade BPPLAS to HOLD (from BUY), with a revised target price of RM1.47. The target price is derived by ascribing a target PER of 14.0x to its FY22f EPS of 10.5 sen.

• Risks to our recommendation include the delicate resin supply chain. Any additional disruptions to the market could further complicate the resin pricing and pressure the group’s margin. Besides, the group is exposed to foreign currency risk on transactions denominated in foreign currencies. Any depreciation of MYR may lead to further margin compression.

Source: Mplus Research - 24 May 2022