HPPHB has seen improved utilisation in its paper moulded packaging division driven by rising environmental standards which is expected to boost profitability in 1QFY25. Furthermore, it is expected to receive increased orders from KAREX (OP; TP: RM1.12) following the launch of the latter's new synthetic condom line. These positive developments are likely to offset the sluggish demand in its E&E segment. We maintain our forecasts, TP of RM0.39 but downgrade our call to UNDERPERFORM after the recent run-up in its share price.

We came away from a recent engagement with HPPHB feeling assured of its prospects. The key takeaways from the meeting are as follows:

1. The recyclable paper pulp moulded packaging products will be the key earnings driver in the long term as most of its customers are transitioning from Styrofoam to recyclable packaging, due to rising environmental standards, especially for exports to the EU market. Its paper pulp division has seen an improvement in utilisation to 30% (vs. 15% in 3QFY24). However, the main challenge for the low utilisation rate is the delay in electricity capacity registration from TNB needed to run the paper pulp machines line. This issue is expected to be resolved by October 2024, with substation completion, allowing utilisation to gradually exceed 50%.
2. HPPHB expects earnings growth to be driven by KAREX new synthetic condom line, with larger deliveries projected in CY25 if the product performs well. As the exclusive packaging supplier of this product, it has fulfilled its first order in November. Based on preliminary estimates, this could conservatively generate at least RM3m in annual revenue. Recall, KAREX remains HPPHB's largest customer, contributing ~37% of its total revenue.
3. The order recovery from its E&E segment has been bumpy, supported by restocking from existing customers, new product launches by its E&E customers and the onboarding of new customers. However, we believe the situation is unlikely to improve significantly over the immediate term given the sluggish demand for consumer electronics products globally.

Forecasts. Maintained.

Valuations. We maintain our TP of RM0.39 based on an unchanged 13x PER, at a premium to the average historical forward PER of 10x for the manufacturing sector largely to reflect HPPHB'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 (see Page 4).

Investment case. We continue to like HPPHB for: (i) its globally recognised G7 Master Colourspace certification that enables it to establish a strong footing in the supply chain of MNCs, providing design, multi-colour and high-resolution offset or flexographic printing solutions, (ii) its strong customer base including Customer D, and (iii) its new recyclable paper pulp moulded packaging products, a substitute to Styrofoam packaging products, that comply with stringent EU environmental standards and are not subject to hefty environmental taxes imposed on Styrofoam packaging products in various countries.

However, these could only become more meaningful if HPPHB could deliver more consistent profits. Downgrade to UNDERPERFORM from MARKET PERFORM.

Risks to our call include: (i) a slow recovery in the global consumer electronics sector, (ii) volatility in the cost of inputs, particularly paper pulp, and (iii) high customer concentration in the consumer electronics segment.

Source: Kenanga Research - 11 Oct 2024