HPPHB's 1HFY25 results disappointed, hit by weak consumer E&E demand and uneven recovery. While its new high-margin paper pulp moulded packaging products show potential, consistent profitability remains elusive. Hence, we slash our FY25-26F net profit by 59-33% and TP to RM0.27 (from RM0.39). Maintain UNDERPERFORM.

Below expectations. Its 1HFY25 core net profit of RM1.6m fell short of expectations, coming in at only 19% and 23% of our full-year forecast and the full-year consensus estimates, respectively. The variance against our forecast came largely from lower-than-expected sales and margins.

YoY, its 1HFY25 revenue declined by 14% due to diminished demand from the E&E space. Consequently, its core net profit plunged steeper by 33%, exacerbated by the continued incurrence of fixed production costs despite lower sales volumes. The reduced production output led to suboptimal utilisation levels, eroding economies of scale.

QoQ, similarly, its 2QFY25 core net profit fell 86% on lower sales volume and higher operating costs.

Outlook. HPPHB is not short of earnings drivers such as: (i) generally higher paper product prices globally of late that should lift its ASPs, (ii) the introduction of its new high-margin recyclable paper pulp moulded packaging products, and (iii) a pick-up in orders, particularly from clients in the E&E, and sheath contraceptive segments on restocking and new product launches. We believe the consumer E&E segment has likely hit bottom, increasing the likelihood of HPPHB experiencing a rebound in orders later this year.

Forecasts. We cut our FY25F and FY26F earnings forecasts by 59% and 33%, respectively, to reflect lower demand for its consumer E&E segment and higher input cost.

Valuations. Consequently, we trim our TP by 31% to RM0.27 (from RM0.39) based on an unchanged 13x FY26F 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. Maintain UNDERPERFORM.

Risks to our call include: (i) a strong recovery in the global consumer electronics sector, (ii) easing of input costs, particularly paper pulp, and (iii) high customer concentration in the consumer electronics segment.

Source: Kenanga Research - 24 Jan 2025