HPI Resources - BUY - 3 Nov 2009

CBRS: HPI Resources - Above expectations (Results Note)



Price: RM1.61 (cum-bonus) RM1.29 (ex-bonus)

Target Price: RM1.77 (ex-bonus)

Recommendation: BUY





· 1Q10 results were above expectations. While 1Q09 revenue of RM88.3m was 24% of our full year’s forecast, net profit of RM6.3m was 33.3% of our forecast driven mainly by lower than expected taxes (8% versus our 19% forecasted) as well as higher than expected gross margins.

· QoQ, revenue was up 15.1% underpinned by its paper milling division which jumped 27% sequentially on the back of higher demand and prices while the packaging division saw an improvement of 12%. Net profit however dipped 19.8% as higher input costs eroded margins with GP % dropping 35 points to 18% (4Q09 : 21.5%).

· YoY, revenue down 11.8% due to the lingering effects of the economic slowdown but net profit jumped 42.6% on the back of contributions from its Perak operation and milling division.

· Outlook improved as the global economic recovery gains momentum. While too early to conclude that the recovery is set, what is certain is that the worst of the crisis could have been behind us. Our economics team is forecasting GPD contraction of 2.1% for 2009 followed by a recovery to growth of between 3% - 4% for 2010.

· 1:4 bonus issue going ex-entitlement on November 13, 2009. The exercise will involve the issue of 10.65m new shares.

· Forecast upgrade as we model in higher margins taking into account the better economic conditions ahead. While we maintain our revenue projections for FY2010 and FY2011, our net profit projection for FY10 is raised by 22.2% to RM23.1m and FY11 by 24.3% to RM23.8m. BUY maintained with a higher target price of RM1.77 (ex-bonus issue) or RM2.21 on a cum basis based on 4x CY2010F. The low multiple is due to the stock’s small cap status and potential cyclical earnings.