CIMB Research retains Reduce for Daibochi at lower target price

KUALA LUMPUR: CIMB Equities Research is retaining its Reduce recommendation for Daibochi Plastic and Packaging as it is trading at an expensive 2018 fully-diluted 20.8 times price-to-earnings (P/E) compared to the sector’s 11.9 times P/E.
    
It said on Thursday the possible de-rating catalysts are further operational cost pressures and weak domestic revenue. 

“Our target price remains, still based on 15.6 times 2018 P/E, a 20% premium over the sector average in view of its Myanmar JV’s attractive long-term growth prospects,” it said. Daibochi’s current price was RM2.20 while the target price is RM1.48.

To recap, Daibochi's 1H17 revenue was down 3.1% on-year to RM181mil while net profit declined a sharper 14.3% on-year to RM10.8mil. 

The weak 1H17 was mainly due to weak domestic revenue and slow 2Q17 export sales. 

In 2Q, the operations of a major multinational corporation (MNC) customer in the Philippines experienced some disruptions and this indirectly affected Daibochi’s export revenue. 

“However, we understand this business was back to normal in July.  The company declared a second interim DPS of 1 sen, below our expectation. So far, it has declared 1.32sen DPS or 60% net dividend payout ratio,” it said. 

CIMB Research pointed out Daibochi’s exports remain the main revenue growth driver but 1H17 export sales were only 54% of its revenue vs. 56% in 1H16. The lower export sales were mainly due to the lower 2Q17 export revenue contribution.

There were no earnings contributions from its 60%-owned Myanmar JV as the JV only started in Jul. The operating costs in Myanmar are much lower than in Malaysia -- PBT margin above 25% vs. only 8-9% in Malaysia. 

As such, the Myanmar JV can handle manufacturing of lower-value added products for some of the customers in Malaysia. This allows the domestic operation to focus on R&D and higher-value added products. 

“We also expect the JV to get a five-year tax exemption from the Myanmar government.    
  
“We believe Daibochi has the first mover advantage in Myanmar. Most of the MNCs are still not established in Myanmar but we believe it would only be a matter of time before more MNCs set up operations in this country,” it said. 

CIMB Research pointed that as Daibochi already works with most of the MNCs in the Asean region, it believed that it would not be difficult for the Myanmar JV to penetrate more MNC business in the country in the near future.   
  
Daibochi’s net gearing has risen from 0.15 times (at end-March) to 0.2 times at end-June. 

“We project the net gearing to rise to 0.35x (which is still manageable) post the investment in the Myanmar JV for US$6.8mil (RM29mil). 

“But we believe the expected strong operational cashflows from the Myanmar JV should help Daibochi reduce its net gearing in one to two years. We cut our FY17F EPS by 6.4% to reflect the weak 2Q17 sales and higher raw material price outlook but keep our FY18-19F EPS,” it said.