HPP Holdings Bhd’s (HPP) 9MFY5/24 core net profit of RM2.3m (-63.8% yoy) was below expectations at 20.1% of CGS’s FY5/24F estimates and 16.1% of Bloomberg consensus.
CGS International, in its Company Note today (Apr 29), said the earnings miss was largely attributable to softer demand from consumer electrical and electronics (E&E), contraceptive and food and beverage (F&B) customers.
Gross margins contracted by 6.8% pts yoy in 9MFY5/24 as the company continued to incur fixed production costs, and utilisation rates across its production lines remained below 50%.
Softer margins, but new renewable packaging may help revenues
CGS expects the remainder of FY24F to be challenging, with demand for packaging products to remain soft and fixed overhead costs to drag margins.
FY25-26F should offer some respite, in CGS’s view, with some recovery in demand from the consumer E&E industry and margin expansion as the company benefits from economies of scale.
Nevertheless, CGS thinks a return to peak Covid-19 revenue (and earnings) levels will be unlikely in the medium-term.
Downgrade to Reduce, with a lower TP of RM0.31
CGS revised their FY24-26F core EPS estimates downwards by 41.4%-70.5% on the back of softer demand from the Group’s key consumer E&E and contraceptive customers.
CGS downgraded their recommendation on HPP from Hold to Reduce due to the softer earnings outlook. CGS’s new TP of RM0.31 (RM0.36 previously) is based on an enterprise valuation (EV) of RM0.24/share and net cash position of RM0.07/share.
CGS derived their EV via a GGM valuation methodology, employing a CY26F ROIC of 8.4%, WACC of 8.8%, and long-term growth rate of 3.0%.
Key upside risks include: (1) faster-than-expected rebound in demand for consumer E&E products resulting in greater sales of HPP’s corrugated packaging products, (2) lower-than expected input material costs (i.e. paper, foams, ink) and (3) better-than-expected take-up of the Group’s new renewable packaging products.
Derating catalysts include: (1) softer demand from key customers in the consumer E&E industry, and (2) margin contractions due to smaller revenue base and fixed overhead costs.
