Kenanga Research cuts its FY24 and FY25 net profit forecasts by 5% and 11%, respectively on the back of its disappointing HPP Holdings Bhd’s (HPP) 1HFY24 results, for the financial year ended 31 May 2024.
“Its 1HFY24 core net profit of RM2.4 million came in at only 17% and 19% of our full-year forecast and the full-year consensus estimate, respectively.
“(The reduction) is to reflect the soft patch in demand for its non-corrugated packaging products and higher input cost,” it said its Results Note today (Jan 19).
Consequently, the research house reduces its TP by 11% to RM0.64 from RM0.72, based on an unchanged 13x FY25F price-earning ratio (PER).
“(The PER is) at a premium to the average historical forward PER of 10x for the manufacturing sector largely to reflect the group’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,” it added.
The research house said HPP Holdings Bhd’s 1HFY24 results disappointed, with 1HFY24 revenue dropped 19%.
“(The drop is) mainly due to weaker sales of its non-corrugated packaging, with a 27% decline year-on-year (YoY), and rigid box, with a decrease of 36% YoY, catering mainly to consumer electronics, sheath contraceptives, food and beverages (F&B) and pharmaceuticals industry.
“Its core net profit (CNP) fell steeper by 48% on high-cost inventory. Quarter-on-quarter (QoQ), CNP plunged 97%, weighed down by by Employees’ Share Option Scheme (ESOS) charge of RM1.3million, which was non-cash,” it added.
However, it expects a stronger second half of the year (2HFY24) on maiden contribution from its new high-margin recyclable paper pulp moulded packaging products, a substitute to similar Styrofoam packaging products.
“The product is cost-effective and not subject to hefty environmental taxes imposed on Styrofoam packaging in various countries.
“We see a ready market for its new products from both existing and new customers given their recyclable attribute, which meets stringent EU environmental standards.
“We also expect a recovery in orders, particularly from the electrical and electronics (E&E) segment on restocking by customers and new product launches,” it said.
“We continue to like HPP for its strong long-term growth prospects, its globally recognised G7 Master Colourspace certification and its robust
customer base including Customer D,” the research house added.
The risks to Kenanga’s call include a slow recovery in the global consumer electronics sector, volatility in the cost of inputs, particularly paper pulp, and high customer concentration in the consumer electronics segment.
