KUALA LUMPUR (Oct 23): CGS-CIMB Research has maintained its “hold” call on HPP Holdings Bhd at 38 sen with a target price (TP) of 36 sen, as it sees a full recovery in electrical and electronics (E&E) demand to Covid-19 levels in the near term as unlikely.

In a note on Monday, the research house said that HPP’s core net profit of RM2.2 million for the first quarter ended Aug 31, 2023 (1QFY2024), lower by 48.1% year-on-year (y-o-y), was deemed in line with its expectations.

It noted that the packaging services provider also recorded higher input costs in 1QFY2024, with gross profit margins falling to 23.4%, mainly due to timing differences in selling price adjustments and movements in input costs.

“We expect gross profit margins to expand in the coming quarters as selling price adjustments kick in,” it said.

However, HPP’s revenue of RM19 million (-21% y-o-y) in 1QFY2024 was below CGS-CIMB’s expectations, dragged by lower contribution from the group’s corrugated, non-corrugated and rigid boxes segments.

"The group recorded lower sales to the consumer E&E, contraceptive and food and beverages (F&B) industries on a y-o-y basis," it said.

The group's corrugated packaging segment, on the other hand, saw a 55.2% increase in revenue on a quarter-on-quarter (q-o-q) basis in 1QFY2024, driven by stronger demand from the consumer E&E industry for paper-based packing products.

“While we believe a full recovery of corrugated packaging demand from the consumer E&E industry back to Covid-19 peaks is unlikely in the near term, it appears the worst is over," it said.

CGS-CIMB also expects HPP's share prices to continue to be supported by dividend yields of 4% (for FY2024- FY2026) and a healthy net cash position of RM37.4 million as of Aug 23.

Meanwhile, the upside and the downside risks for HPP are faster or slower-than-expected rebound in demand for consumer E&E products, which will result in the sales of its corrugated packaging products, and lower or higher-than-expected input material costs (paper, foams, ink), coupled with the group's ability to pass on these costs to customers.

At 9.44am, shares of HPP were half a sen or 1.35% lower, with a market capitalisation of RM141.78 million.

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