CGS-CIMB reiterated its HOLD recommendation for HPP Holdings Bhd (HPP) as it expected an overall soft demand from consumer electrical and electronics (E&E), contraceptive and food and beverages (F&B) customers in the near term, amidst inflationary pressures and a volatile global economy.
“In our view, however, in the longer term, rising global awareness globally should benefit HPP’s revenue and net profit with its recyclable product offerings gaining interest from existing foreign customers,” it said in its Company Flash Note on Friday (Jan 19).
It also retained its HOLD call despite the group’s weak quarterly results, given its high FY24 to FY26F dividend yields and healthy net cash position.
“The FY24-26F dividend yields of 4.8% and a healthy net cash position of RM34.2 million or RM0.09 per share should lend support to its share price, in our view,” it said.
The research house said assigned a GGM-derived TP of RM0.36, employing a FY5/24F return on equity (ROE) of 9.1%, cost of equity of 8.5% and long-term growth rate of 2%.
“Our forecasts imply a 10.5 CY25F P/E multiple, which is 1.5 sd below HPP’s historical mean and is near the middle of the pack compared to local and regional peers,” it said.
On the group’s result, CGS-CIMB said the packaging service provider reported a 1HFY5/24 core net profit of RM2.2 million, a decline of 49.3% year-on-year (YoY), is below expectations at 33.1% of our FY24F estimate and 26.5% of Bloomberg consensus.
“The group reported a lower revenue contribution in the first half of the year (1H) from the noncorrugated packaging segment, at RM19.1 million, a decline 27.2% YoY, as well as from rigid box segment, at RM3.9 million, a decline of 19.7% YoY.
“More positively, the corrugated packaging segment recorded 23.4% quarter-on-quarter (QoQ) growth in revenues to RM5.7 million, continuing to show some recovery momentum.”
It added timing differences in selling price adjustments and rising raw material prices, resulting in adjusted gross profit margins (GPM) falling 2.7% pts QoQ to 20.7% in 2QFY5/24.
“Note that the adjusted GPM excludes RM1.3 million share-based payments recognised during the quarter due to previously granted employee share option scheme (ESOS) back in 2021.”
The key upside and downside risks of CGS-CIMB’s call include faster or slower-than-expected rebound in demand for consumer E&E products and lower or higher-than-expected input material costs, coupled with HPP’s better or worse-than-expected ability to pass on these costs to customers.
