Riding on structural shift to paper packaging
- We view HPP as a prime beneficiary of the structural shift to paper packaging given its expertise in full colour paper-based packaging printing services.
- Growth prospects to be driven by: i) demand recovery from end-user sectors, ii) margin expansion on better product mix, and iii) capacity expansion.
- Initiate with Add and a TP of RM0.48 (15x CY23F P/E, its historical mean P/E since listing), backed by robust earnings CAGR of 18.2% (FY22-25F).
Melaka-based internationally-certified packaging printing provider
HPP Holdings Berhad (HPP) is a packaging printing company in Malaysia specialising in the production of highly customised paper-based packaging with multi-coloured prints. We estimate that HPP is the only publicly-listed packaging printing company in Malaysia to be accredited with the G7 Master Facility Colourspace certification (industry-leading printing quality and processes), which is a key criterion for MNCs in selecting their preferred packaging printing provider. We believe this gives HPP greater pricing power and ease of penetrating new markets as well as helps it gain new clients vs. its peers. Given this, coupled with a more efficient operation (due to reduced paper waste and ink consumption as required by the certification), HPP managed to achieve higher core net profit margin of 8-16% vs. selected plastics packaging peers (5-10%) over FY19-21.
Proxy for consumer E&E sector with an established clientele base
We like HPP as an indirect proxy for the consumer electrical and electronics (E&E) sector (63% of FY22 sales) and given its established clientele base (mostly MNCs). With the robust industry outlook for consumer E&E in Malaysia (2022-2025F sales CAGR of 21.2%, according to Statista), we believe HPP will grow its printing capacity by 20% and double its rigid boxes production capacity towards end-FY23F to cater to growing demand from its existing customers and from marketing efforts to secure new ones via physical exhibitions and tradeshows following lifting of Covid-19 restrictions.
Prime beneficiary of a structural shift towards paper packaging
We see HPP as a beneficiary of the industry tailwinds for paper packaging as we believe more consumer packaged goods companies may shift their packaging strategy towards paper-based given the high recycling rate of paper of 68.2% (vs. plastic: 8.7%) and the rising trend of sustainable packaging. This is premised on HPP’s extensive paper-based packaging product portfolio comprising: i) corrugated packaging (32.3% of FY5/22 revenue), ii) non-corrugated packaging (40.8%), iii) others, including brochures, leaflets, labels and paper bags (4.7%), and iv) trading and production of rigid boxes (22.2%).
Initiate coverage with an Add rating; a recovery play
We expect HPP to post a 3-year EPS CAGR of 18.2%, driven by: i) recovery in sales from its customers facing temporary supply shortage of chips and labour in FY22 in the consumer E&E sector, which led to lower packaging demand, ii) more favourable product mix, and iii) higher economies of scale from higher utilisation rate. We initiate coverage on HPP with an Add call and TP of RM0.48 (15x CY23F P/E, its historical mean P/E since listing). We estimate that HPP is currently trading at an undemanding 12.2x CY23F P/E, a 18.7% discount to its historical mean (15x). Re-rating catalysts: stronger demand from the consumer E&E segment. Downside risks: weak margins on spike in paper costs.