BPPLAS guided for a sustained recovery underpinned by, among others, a robust air travel market which translates to higher demand for plastic packaging used for transportation and storage purposes.

It also expects higher sales for its high-margin thinner gauge stretch film and technical customised blown film. We raise our FY24F and FY25F earnings forecasts by 4% and 3%, respectively, lift our TP by 16% to RM1.42 (from RM1.23) and upgrade our call to OUTPERFORM from MARKET PERFORM.

We came away from a post-results engagement with BPPLAS feeling upbeat on its outlook. The key takeaways are as follows:

1. Resilient demand amidst challenges. BPPLAS guided for the pick- up in demand for plastic package since 2HCY23 to sustain for the rest of FY24 and into FY25, underpinned by, among others, a strong revival in both business and leisure travelling, which translates to higher demand for plastic packaging used for transportation and storage purposes. For FY24, BPPLAS is targeting sales volumes to grow 8%-10% YoY to both domestic and overseas buyers.

2. Driven by innovative premium products. Its topline growth will also be driven by higher sales of premium products including: (i) thinner gauge stretch film (with thicknesses as low as 10 microns for machine rolls and 6 microns for hand rolls) for more sustainable packaging market, and (ii) technical customised blown film, especially from its two co-extrusion blown film machines which were commissioned at the end of FY23.

We believe BPPLAS’s nano stretch film has a strong competitive edge in the US and European US markets given the high cost structure, particularly, energy cost of the local producers there.

3. Strategic investments for efficiency. We understand that BPPLAS is planning for c.RM35m capex in FY24, which will go to: (i) new printing and cutting machines (to be commissioned in 2HCY24 to boost margins), (ii) additional solar panels to reduce electricity cost, and (iii) upgrading of the power supply system in the plant.

Forecasts. We raise our FY24 and FY25F earnings forecasts by 4% and 3%, respectively, on the back of better selling product mix and improving margins.

Valuations. Consequently, we lift our TP by 16% to RM1.42 (from RM1.23) and this adjustment is attributed to: (i) increased PE multiple of 10x (from 9x), considering the higher growth potential associated with its high-margin premium stretch film and blown film products, and (ii) updated earnings forecasts for FY24. Our 10x valuation remains at a discount to the sector’s average historical forward PER of 13x, largely to reflect BPPLAS’s relatively smaller market capitalisation and thin share liquidity.

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 like BPPLAS for its: (i) strong foothold in the SE Asia market which is expected to remain resilient despite global economic uncertainties, (ii) strong cash flows and balance sheet (a net cash position) that will enable it to weather downturns better, and (iii) long-term capacity expansion in high-margin premium stretch film and blown film products. Upgrade to OUTPERFORM from MARKET PERFORM.

Risks to our call include: (i) volatility in resin prices, (ii) reduced demand for packaging materials due to an extended global economic slowdown, and (iii) rise in freight costs.

Source: Kenanga Research - 12 Mar 2024