KUALA LUMPUR (April 22): Kenanga Investment Bank has slashed its earnings forecasts for HPP Holdings Bhd after the company's disappointing latest set of quarterly earnings, coupled with lower demand for non-corrugated packaging products and higher input costs. 

Shares of HPP dropped over 3% to a low of 32 sen on Monday’s morning trade. As of 10.56am, the counter decreased by 1.52% or half a sen at 32.5 sen, with some 128,600 shares changing hands. At the current price, it was valued at RM126.24 million. 

Year-to-date, HPP’s share price has fallen over 8%. Two analysts have a "hold" call for the stock, with a 12-month target price (TP) of 32 sen, according to Bloomberg.

According to Kenanga, HPP's nine-month core net profit of RM1.7 million [ended Feb 29, 2024] was below the research firm’s expectations, representing only 16% and 15% of its full-year forecast and the full-year consensus estimate, respectively.

It also added that  investors’ sentiment towards the stock is unlikely to improve without a demonstration of more consistent profitability.

“Consequently, we halve our TP to 32 sen [from 64 sen] based on 13x CY2205F PER [price-earnings ratio] at a premium to the average historical forward PER of 10x for the manufacturing sector largely to reflect HPP’s niche strength in high-quality box printing, and a strong client base comprising prestigious multi-nationals,” it said. 

"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," Kenanga added.

HPP slipped into the red in 3QFY2024 for the first time since its listing on the ACE market in January 2021, mainly due to commission payments of RM520,000 and a one-time compensation payment of RM400,000 million to foreign workers, in line with the group's adherence to its zero recruitment fee policy. 

It posted a net loss of RM62,200 in 3QFY2024 compared to a net profit of RM1.53 million in the previous corresponding quarter. This resulted in a 71.24% decline in the group's net profit for 9M, falling to RM1.73 million from RM6.02 million.