HPPHB’s 9MFY24 results disappointed as it slipped into the red in 3QFY23 due to weak orders and higher input cost. While HPPHB is not short of earnings drivers, it needs to demonstrate more consistent profitability. We cut our FY24-25F net profit forecasts by 74% and 56%, respectively, and halve our TP to RM0.32 (from RM0.64). Downgrade to MARKET PERFORM from OUTPERFORM.

Its 9MFY24 core net profit of RM1.7m disappointed, coming in at only 16% and 15% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from a loss in the 3Q due to weaker sales and margins.

YoY, HPPHB’s 9MFY24 revenue fell 18% dragged down largely by weaker sales volumes and ASPs from the non-corrugated packaging (- 29% YoY) and rigid box segments (-29% YoY) for its customers in the consumer electronics, sheath contraceptives and F&B segments, while we believe sales to customers in pharmaceutical space improved. Its 9MFY24 core net profit plunged by a steeper 72% on higher labour cost and, a sub-optimal utilisation rate resulting in loss of economies of scale.

QoQ, it dipped into the red in 3QFY24 on lower sales and higher input cost.

Outlook. HPPHB is not short of earnings drivers such as: (i) generally higher paper product prices globally of late that should lift its ASPs, (ii) the introduction of its new high-margin recyclable paper pulp moulded packaging products, and (iii) a pick-up in orders, particularly from clients in the E&E segment on restocking and new product launches. However, investors’ sentiment on the stock will not improve unless it starts to show more consistent profitability.

Forecasts. We cut our FY24-25F earnings forecasts by 74% and 56%, respectively, to reflect lower demand for its non-corrugated packaging products and higher input cost.

Valuations. Consequently, we halve our TP to RM0.32 (from RM0.64) based on 13x CY25F PER, at a premium to the average historical forward PER of 10x for the manufacturing sector largely to reflect HPPHB’s niche strength in high-quality box printing, and a strong client base comprising prestigious multi-nationals. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to like HPPHB for: (i) its globally recognised G7 Master Colourspace certification that enables it to establish a strong footing in the supply chain of MNCs, providing design, multi-colour and high-resolution offset or flexographic printing solutions, (ii) its strong customer base including Customer D, and (iii) its new recyclable paper pulp moulded packaging products, a substitute to Styrofoam packaging products, that comply with stringent EU environmental standards and are not subject to hefty environmental taxes imposed on Styrofoam packaging products in various countries. However, these could only become more meaningful if HPPHB could deliver more consistent profits. Downgrade to MARKET PERFORM from OUTPERFORM.

Risks to our call include: (i) a slow recovery in the global consumer electronics sector, (ii) volatility in the cost of inputs, particularly paper pulp, and (iii) high customer concentration in the consumer electronics segment.

Source: Kenanga Research - 22 Apr 2024