April 15, 2010

Disappointing 3Q from HPI Resources, says Kenanga

HPI Resources Bhd
(April 14, RM1.64)
Downgrade to hold at RM1.65 with target price lowered to RM1.60
: HPI's 3QFY10 results disappointed due to margin compression. While 9MFY10 revenue of RM271 million was 73% of our forecast, its net profit of RM15.6 million merely accounted for 68% of our full-year forecast. The sudden crimping of its margins on higher input prices, especially paper, was to blame.

Quarter-on-quarter, revenue rose 7% on higher contribution including both its Malaysian operation (+6.5%) as well as from Cambodia (+11.3%). Margins however took a beating with group gross margin easing to 13.6% from 18.9% previously. Malaysian pre-tax margin eased to 4.2% (2QFY10: 7.6%) while Cambodia collapsed to a mere 1.2% (2QFY10: 14.8%).

Year-on-year, revenue rose 22% with net profit jumping 110% driven by a general improvement in the global economic conditions, higher turnover and lower effective taxes.

HPI's outlook is becoming slightly more uncertain in the near term especially on its margins given the volatile commodity and currency markets. While global economic conditions continue to improve, profitability could pose a near-term risk given the recent volatility in input prices and currencies. Paper prices have continued to firm on growing demand from China while the supply for pulp was crimped due to the recent quake in Chile which supplies some 8% of global pulp.

Our forecast has been trimmed given the heightening risk to profitability. While maintaining our top line forecast, margins are lowered as we factor in a tougher environment going forward. The repricing of its end products could slow down the commodity and currency cycles in the near term. We are lowering our net forecast by 22% to RM18 million for FY10 and another 32% for FY11 to RM16.2 million. Our target price is lowered to RM1.60 and our recommendation is also downgraded to hold from buy. - Kenanga Research, April 14


This article appeared in The Edge Financial Daily, April 15, 2010.

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