BP Plastic Holdings (BPPLAS) guided for a slow recovery in sales in the second half of the financial year 2023 as the global economy remains soft. This will be partially cushioned by restocking by end users and BPPLAS’s shift towards higher-margin products such as premium stretch film, said Kenanga Research (Kenanga) in the Company Update Report.
“Meanwhile, substantive enquiries on its products during a recent international trade fair in Germany may translate to orders from new customers in the financial year 2024. BPPLAS’s margins will continue to come under pressure in the second half of the financial year 2023 due to higher labour and energy costs,” said Kenanga.
The higher labour cost stems from the upwards adjustment in the minimum wage last year, coupled with the reduction in the maximum weekly working hours to 45 from 48, pursuant to the amendment of the Employment Act 1955 effective Jan 2023.
Meanwhile, the full impact of the electricity tariff hike in Jan 2023 will be felt in the second half financial year 2023 in the absence of an extension to the Green Electricity Tariff programme which expires in Jun 2023.
Recall, under the programme, electricity users are offered an exemption to the Imbalance Cost Pass-Through surcharge of 20 sen per kilowatt hour via a subscription charge of 3.7 sen per kilowatt hour. However, this offer to buy renewable energy is capped at 30% of the user’s total electricity consumption.
Meanwhile, its two blown film machines are on track to come online in quarter three financial year 2023 and quarter four financial year 2023, respectively, to meet the demand for stretch hood and shrink film. The two blown film machines will increase its nameplate capacity by 800 tonnes per month, bringing its total annual nameplate capacity for stretch and blown films to 148k tonnes.
“We maintain our trading price of RM1.23 based on 9x financial year 2024 future price-earnings ratio, at a discount to the sector’s average historical price-earnings ratio of 13x to reflect BPPLAS’s relatively smaller market capitalisation and thin share liquidity. There is no adjustment to our trading price based on environmental, social, and governance given a 3-star rating as appraised by us,” said Kenanga.
Kenanga favours BPPLAS for its strong foothold in the Southeast Asia market which is expected to remain resilient despite the global economic uncertainties, its strong cash flows and balance sheet that will enable it to weather downturns better, and its long-term capacity expansion in high-margin premium stretch film and blown film products, which will enable it to capitalise on the next up cycle.
However, its prospects over the immediate term are clouded by a slowdown in the global economy. Kenanga maintains Market Perform for BP Plastic Holdings. Risks identified by Kenanga include sustained higher resin cost, reduced demand for packaging materials in the event of a sharp slowdown in the global economy, and labour shortages.
