HPP Holdings Berhad: A Cautionary Tale of Declining Profitability and Low ROE for Long-Term Investors

In the ever-evolving world of real estate investment, HPP Holdings Berhad (KLSE:HPPHB) stands as a case study in the perils of declining profitability and poor capital allocation. For long-term investors, the company's financial trajectory raises critical questions: Is the current valuation justified? Does its business model support sustainable growth, or is it a house of cards built on short-term fixes? Let's dissect the numbers and logic behind these concerns.

The Erosion of Profitability

HPP Holdings Berhad's 2024 annual report paints a bleak picture of a company struggling to maintain its core financial metrics. Earnings per share (EPS) plummeted by 54.2% year-over-year to RM0.011, with a five-year average earnings decline of -24.7%. Revenue, too, has contracted, shrinking by -10.98% in 2024 and averaging a -11% annual decline over the past five years. These figures are not just numbers—they signal a systemic failure to grow revenue or protect margins.

The company's net profit margin of 4.8% in 2024, down from 7.2% in 2023, underscores a worsening ability to convert sales into profits. Worse still, its return on equity (ROE) of 1.6% lags far behind the industry average of 8.4%. ROE is a critical metric for equity investors, as it measures how effectively a company generates profits from shareholders' capital. HPP's ROE suggests a lack of discipline in capital allocation, with profits siphoned away through a high payout ratio (68% median over three years) rather than reinvested in growth opportunities.

The High Cost of Dividend Dependence

HPP's dividend policy is a double-edged sword. While the company has paid dividends for four consecutive years—most recently declaring an interim dividend of RM0.005 per share—it has done so from a shrinking earnings base. A 68% payout ratio leaves only 32% of profits for reinvestment, severely limiting the company's ability to fund organic growth. This is particularly problematic in a sector like real estate, where capital expenditures and strategic repositioning are often necessary to stay competitive.

Compare this to industry peers who retain a larger portion of earnings to fund development, acquisitions, or technology upgrades. HPP's approach prioritizes short-term shareholder returns over long-term value creation. For investors seeking capital appreciation, this strategy is a red flag.

Recent Developments: A Glimmer of Hope or a Mirage?

The first quarter of 2025 brought mixed signals. While HPP reported a net loss of $74.7 million, it also executed significant asset sales and secured $475 million in commercial mortgage-backed securities financing. The company's liquidity of $838.5 million provides some breathing room, but this is a temporary reprieve, not a solution.

A modest recovery in Q3 2025—net income of RM224,000 and revenue growth of 8.6%—offers a sliver of optimism. However, this improvement is overshadowed by a five-year net income decline of 23% and a ROE that remains stubbornly low. Analysts project earnings growth of 100% and revenue growth of 22.1% annually, but these forecasts lack a solid foundation. Recent downward revisions to EPS estimates (14% and 11% in January and October 2025, respectively) suggest skepticism about the company's ability to deliver on these projections.

The Capital Allocation Dilemma

HPP's capital allocation decisions further exacerbate its challenges. The company's ROCE (Return on Capital Employed) has plummeted from 17% five years ago to 3.0% as of February 2025, a stark decline that highlights inefficient use of assets. While capital employed has increased, sales have stagnated, indicating that investments are not translating into top-line growth.

This misalignment between capital and revenue growth is a critical warning sign. For real estate firms, where asset value and occupancy rates are paramount, HPP's inability to generate returns on capital employed suggests a failure to adapt to market dynamics. The recent sale of properties like Foothill Research Center and Maxwell underscores a defensive strategy focused on liquidity rather than value creation.

Investment Implications: Sell, Hold, or Hope?

For long-term investors, the calculus is clear: HPP Holdings Berhad's weak financial performance and low ROE make it a risky proposition. The company's reliance on dividends, combined with poor capital reinvestment and a history of declining profitability, does not align with the principles of compounding value. While the recent Q3 recovery is encouraging, it is insufficient to offset years of underperformance.

However, the stock's 12% decline over three years may present a contrarian opportunity for those willing to bet on a turnaround. This would require a significant shift in management strategy, including a pivot from dividend payouts to reinvestment in high-growth assets or a strategic overhaul of the portfolio. Until such changes materialize, the fundamentals remain unattractive.

Conclusion: A Hold with Caution

HPP Holdings Berhad's current trajectory suggests a hold for long-term investors, but with significant caution. The company's declining ROE, high payout ratio, and weak capital allocation practices justify skepticism about its ability to deliver sustainable returns. While short-term liquidity measures and modest revenue growth offer some hope, they are not enough to outweigh the long-term risks. Investors should monitor the company's strategic direction closely and consider divesting if there are no signs of meaningful improvement in capital efficiency or profitability.

In the end, HPP's story is a reminder that even in the real estate sector, where tangible assets provide a veneer of stability, poor execution can erode value just as quickly as it can build it. For those seeking resilience and growth, the path forward for HPP remains uncertain at best.