BPPLAS's 9MFY24 profit missed our expectations. Margins were squeezed in 3QFY24 due to the running down of higher-cost resin inventory bought during less favourable MYR exchange rate. Despite 7% revenue growth, 9MFY24 core net profit decreased 7%YoY as rising operating costs offset the increase in export sales. Looking ahead the company is focusing on expanding its product range into higher-margin products to mitigate cost pressures which should flow more into FY25 earnings. Maintain our forecast and TP of RM1.42 and OUTPERFORM call.

Forex Impact. BPPLAS's 9MFY24 revenue of RM370m was in line with our expectations but reported net profit missed Kenanga and consensus estimate. However, after adjusting for unfavourable currency impact, 9MFY24 core net profit of RM22m was broadly within expectations at 65% of our full-year forecast and 59% on full-year consensus estimate. The key variance against our forecast came largely from higher-than-expected production cost pressure due to unfavourable forex impact but also higher utilities and depreciation charges from recent expansion. A DPS of 1.5 sen was declared in 3QFY24 (consistent with 3QFY23), on track to meet our full year forecast of 6.5 sen.

3QFY24 turnover rose by 3% QoQ and 6% YoY on better local demand (+2% QoQ) and exports beyond Asia (+33% QoQ) while Asian demand (excluding Malaysia) dipped 2% QoQ. However, due to the running down of older, more costly resin bought when the MYR was weaker, 3Q production cost was elevated while the firmer MYR was already reflected in exports prices. Accordingly, its core net profit decreased -28% QoQ and - 20% YoY.

Outlook. The demand for plastic packaging is expected to grow slowly in the near term, due to modest global economic recovery. Relatively low resin prices, which translate to low plastic packaging ASP, also causes a lack of urgency for buyers to stock up. However, we believe BPPLAS could see better orders with the launch of: (i) a new stretch hood product after having successfully tested it in 1HCY24, and (ii) a new blown film packaging film product for the F&B sector which is on track to come online in 4QCY24.

These higher-margin products, along with premium-grade stretch films, should help cushion the impact of rising costs and would likely form >30% of sales mix over the next few years. In addition, Malaysian players including BPPLAS, backed by lower cost structure, are also well positioned to gain market shares in the global market from their overseas peers.

Forecasts. Maintained.

Valuations. We also keep our TP of RM1.42 based on 10x FY25F PER, at a discount to the sector's average historical forward PER of 13x, largely to reflect BPPLAS' 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, and (ii) its expansion plans especially production capacity for sustainable packaging products such as nano stretch film, backed by a strong balance sheet that is in a net cash position. A potential re-rating catalyst could be the favourable market reception of its new high-margin products such as stretch hood and new blown film packaging film product, both coming in from 2HFY24. We see potential value emerging given the recent price weakness.

Maintain OUTPERFORM.

Risks to our call include: (i) reduced demand for packaging materials due to an extended global economic downturn, (ii) rise in freight costs, and (iii) adverse fluctuations in the foreign exchange market.

Source: Kenanga Research - 27 Nov 2024