KUALA LUMPUR: Kenanga Research is ending its Trading Buy rating on BP Plastics Holding Bhd given no capacity growth in FY17-18, and FY19 capacity expansion plans still at their infancy stage.
"We expect capacity to remain unchanged in FY17-18 as there is no plan for capacity expansion during this period. However, the Group may acquire new machinery by end of FY18 which would accrete only in FY19," it said in its morning research note.
The research firm said it expects the ringgit to strengthen to RM4.10 on average in FY18 from its previous assumption of RM4.20, leading a decline in the company's topline due to 63% of its sales being denominated in US dollar, 11% in Singapore dollar and 5% in other foreign currencies.
"Our sensitivity analysis suggests that a 1.0% decline in forex rates could cause top-line to decline by 0.6%," it said.
Compared to its peers, BP Plastics has a lower earnings before interest and tax (Ebit) than its peers fiven the higher operational and resin cost which could not be passed on completely to its customers to maintain competitive pricing.
It added that its closest peers, Scientex and Thong Guan, have 7% and 8 % Ebit respectively, which compare to 4% for BP Plastics.
Kenanga Research revised its earnings assumption for BP Plastics to RM13.7mil from RM28.9mil previously.
However, it believes FY19 may see earnings improvements as the group finalises its expansion plans.
"The Group had spent RM5.0m in FY17 to build a new factory and warehouse (BP11), and is allocating capex of c.RM25.0m on new machinery in FY18-19 which can be fully funded by cash due to its strong net cash position."
It added that it expects FY18 dividend of 5.7 sen, which is a dividend payout ratio of 80%, slightly under the three-year average dividend payout ratio of 88%.
Kenanga Research believes BP Plastics is fairly valued with a target price of RM1.10, down from RM2.15.
"We may relook the stock if FY19E capacity expansion is greater than our expectations," it said.
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