Daibochi still expensive, says CIMB Research

KUALA LUMPUR: CIMB Equities Research is maintaining its reduce call on Daibochi Plastic and Packaging as the stock’s valuation remains expensive at a fully-diluted 21.7 times FY18F P/E.

It said on Tuesday the target price remains unchanged at RM2.02 (versus the last traded price of RM2.32) which is based on 2019F 15.6 times P/E, a 20% premium over the 13 times P/E sector average due to the Myanmar JV’s attractive long-term growth prospects. 

“Possible de-rating catalysts are rising raw material costs and weak domestic revenue. Upside risks are higher than expected revenue from Myanmar JV,” it said.

CIMB Research said Daibochi’s FY17 revenue was up 4.7% on-year to RM388.6mil while net profit was up a stronger 5.7% on-year to RM26.0mil. 

The higher revenue and net profit growth were mainly due to contributions from the new Myanmar JV which was set up in early-July 2017. 

FY17 EBITDA margin was 13.1% compared to FY16’s 12.2% mainly due to Myanmar’s higher PBT margin compared to domestic operations. The higher Myanmar PBT margin was mainly due to lower labour costs in the country. 

The company declared a 1.3 sen final DPS, marginally above our expectations. FY17 DPS declared was 4.77 sen, which we estimate makes a 64% net dividend payout ratio, ex-Myanmar operations.    

Myanmar’s 4Q17 revenue was up 31.3% on-quarter at RM8.5mil. The higher revenue in 4Q17 was mainly due to the maiden RM1.6mil export revenue recognised last December. 

However, Myanmar’s 4Q17 PBT declined 11.5% on-quarter at RM1.63mil mainly due to higher raw material costs, which the company was not able to pass on to its customers. 

“The company indicated that, on average, 4Q17’s raw material costs rose 7% on-quarter,” it said.

Daibochi announced that the Myanmar JV received a five-year tax exempt status from the Myanmar government in December 2017 and it plans to start claiming tax exemptions from FY18F onwards. 

“In our earnings forecast, we have already assumed tax-free earnings from the Myanmar JV over the next five years.  

“As at end-December, Daibochi’s net debt was at RM51.5mil or 0.25 times net gearing level compared to RM38.2mil (0.2 times net gearing) at end December 2016. 

“The higher net debt at end December 2017 was mainly due to the investment of US$6.8m in the 60% equity stake in the Myanmar JV,” it said.

CIMB Research said the company expects the domestic operations to experience a more than 10% revenue growth in 2018 as it starts delivering orders for a major MNC pet food customer and another MNC this year. 

“We also expect the Myanmar JV to handle orders previously not taken up by the domestic operations as they were deemed unprofitable. Due to the lower labour costs of the Myanmar JV, fulfilling these orders may now be feasible,” it said.