CIMB Research retains Reduce call on Daibochi

KUALA LUMPUR: CIMB Equities Research is maintaining its Reduce call on Daibochi Plastic &Packaging pending further financial details on the Myanmar joint venture at the company's 1Q17 results briefing this Friday. 

It said on Thursday its target price remains at 2018F 13 times price-to-earnings (P/E) which is its target P/E for the packaging sector. 

De-rating catalysts include further operational cost pressures and slowdown in domestic sales. Risks to its call are stronger-than-expected export sales growth and strong Myanmar JV earnings.

On Wednesday, Daibochi announced that the Myanmar Investment Commission has approved its proposed Myanmar JV. No other details were given. 

In November 2016, Daibochi proposed to set up a JV company, Daibochi Packaging (Myanmar) Co. Ltd. (DPM), with Myanmar’s Smart Pack Industrial Company Ltd (MSP). 

The plan was for Daibochi to invest US$6.8mil (RM29.4mil) for a 60% stake while MSP injects its assets of plant and equipment for the balance 40% share of the JV and US$6.8mil cash.
MSP produces flexible packaging products in Myanmar, specialising in home personal care products. MSP is owned by a major local conglomerate and this company is not the conglomerate’s core business. 

MSP was set up in 2013 to cater to the packaging needs of the conglomerate's own home personal care products.

“We believe MSP’s FY16 net profit should be around US$2mil and as such, the deal would be at FY16 5.5 times to six times P/E, which is attractive in view of the exciting long-term potential of Myanmar’s flexible packaging industry.

“This JV should help Daibochi expand its business in Asean and possibly become one of the largest flexible packaging companies in Myanmar. 

“The JV should also help boost the group’s pretax profit margin beyond the current 8%-9%. We understand MSP’s pretax profit margin is around 30%, more than three times higher than Daibochi’s.

“Daibochi also has the first mover advantage in Myanmar. There are not many MNCs currently in the country and it would only be a matter of time before MNCs invest in this country. In addition. 
Daibochi would have access to the low-cost workforce in Myanmar. 

“This should help it address the issue of foreign worker shortage in Malaysia. Daibochi could source foreign workers from Myanmar to work in Malaysia.

“The company’s net debt is set to rise from RM41mil (as at end November 2016) to RM71mil after the investment for the 60% stake in Daibochi Packaging (Myanmar), and net gearing would rise from 0.22 times to 0.4 times. 

“However, we are not too worried in view of the company’s strong operational cashflow outlook. Daibochi Packaging (Myanmar) is seeking tax exempt status from the authorities in Myanmar. Myanmar’s corporate tax rate is currently 25%,” it said.