HPPHB's 1QFY25 results were weak, albeit within our expectation on a subdued 1HFY25 due to ongoing slow demand for consumer E&E and an uneven recovery. Some reprieve is in sight as we anticipate a near-term earnings boost from its new high-margin paper pulp moulded packaging products. Overall outlook is likely to recover only in FY25, based on early recovery signs in E&E orders. Hence, we maintain our forecasts, TP of RM0.39 and UNDERPERFORM call.

Stronger 2H. Its 1QFY25 core net profit of RM1.4m came in at only 16% and 20% of our full-year forecast and the full-year consensus estimates, respectively. However, we consider the results within expectations given that a weaker 1HFY25 was anticipated due to delays in electricity capacity registration from TNB for its paper pulp machinery. We expect a strong 2HFY25, primarily driven by growth in its paper moulded packaging division and increased demand from sheath contraceptive customers.

YoY, its 1QFY25 revenue contracted by 12% mainly due to its corrugated packaging (-22% YoY), non-corrugated packaging (-18% YoY), weighed down by weaker demand from the E&E and sheath contraceptive industries. However, this was partially offset by its rigid box (+22% YoY), likely supported by stronger demand for non-electrical household products and other consumer products.

All considered, its core net profit plunged by a steeper 39%, exacerbated by suboptimal utilization levels, leading to a loss of economies of scale.

QoQ, similarly, its core net profit fell 41% on lower sales volume and higher operating costs.

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 and sheath contraceptive segments on restocking and new product launches. We believe the consumer E&E segment has bottomed out and is showing early signs of recovery.

Forecasts. Maintained.

Valuations. Consequently, we maintain our TP of RM0.39 based on an unchanged 13x FY26F 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. Maintain UNDERPERFORM.

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 - 18 Oct 2024