WITH more global firms jumping on the sustainability bandwagon, the prospects of the eco-friendly and low-carbon packaging industry appear to be promising.
An independent study by Grand View Research valued the global green packaging market size at US$258.74bil (RM1.06 trillion) in 2019 and is expected to grow at a compound annual growth rate of 6% from 2020 to 2027.
Melaka-based Daibochi Bhd, which makes sustainable flexible plastic packaging (FPP) for notable multinational corporations (MNCs) and domestic brands, is leveraging on this emerging demand for its future growth.
The group, which reported 8.9% year-on-year (y-o-y) jump in net profit for the first half ended Jan 31, says its sustainable polypropylene-based mono-material laminate packaging products have been increasingly adopted by major customers in the past year.
In the second quarter ended Jan 31, one of Daibochi’s MNC clients adopted the group’s mono-material laminate structure for two of its popular food and beverage (F&B) brands.
This follows similar adoptions of mono-material laminates by several MNCs in the financial year ended July 31,2020 (FY20), comprising various F&B packaging formats such as pouches, sachets, stickpacks and bar wrappers.
Among Daibochi’s MNC clients are Nestle, Mondelez International, Pepsico, Hershey’s, Dutch Lady and Ajinomoto.
Daibochi’s sustainable, fully-recyclable FPP solutions have been jointly developed with its parent company, Scientex Bhd.
Scientex owns about 62% stake in Daibochi.
Scientex produces stretch films, which are thin plastic films that are used for packaging. Daibochi sources its raw materials from Scientex, leveraging on its access to the global resin market.
KAF Securities Research pointed out in a recent note that Daibochi plans to continue working closely with Scientex in producing sustainable FPP solutions, through its integrated operations and ongoing research and development efforts.
“Daibochi aims to stay ahead of the curve, as the management expects demand for sustainable FPP to increase.
“We find the stock to be oversold as we see strong growth in future earnings, driven by increasing demand for its innovative and sustainable flexible plastic packaging solutions in the South-East Asia and Oceania regions, ” it said.
KAF Securities Research has maintained a “buy” call on Daibochi, with a target price of RM2.90.
Meanwhile, MIDF Research also has a “buy” call on the stock, premised partly on the “expected resilient demand for sustainable FPP solutions, which are used in the F&B and fast-moving consumer goods (FMCG) segment”.
“While the soft market conditions and the uncertainties brought on by the political instability in Myanmar will pose challenges to the group in the near term, we postulate that the group’s performance will continue to remain sanguine, ” it said.
Daibochi’s manufacturing operations in Yangon, Myanmar, experienced sporadic halts following a military coup in February 2021 that resulted in massive protests.
Myanmar contributes about 5% of the group’s revenue in the first half of FY21.
“Moving forward, the group is continuing the operations in Myanmar by sourcing raw materials internally and catering to its clientele base there. Currently, the Myanmar segment is operating on a one-shift basis, ” according to MIDF Research following a briefing with the management.
Looking ahead, aside from growing its footprint in the sustainable FPP market, Daibochi has embarked on an expansion drive that seeks to grow its production capacity by 60% by FY21, as compared to its FY19 levels.
“We remain on track in our current capital expenditure (capex) programme from FY19 to FY21 to expand our production capabilities and packaging formats, ” according to Daibochi executive director Low Jin Wei.
KAF Securities Research noted that Daibochi has utilised about 50% of the RM100 capex allocated.
In the second quarter of FY21, the group commissioned new bag-making machines to serve the pet food market. It has also expanded its production capacity for stand-up pouch by 100% and zipper flat bottom pouch by 114%, allowing it to grow its product portfolio for current and future clientele.
Moving forward, Daibochi plans to roll out new innovations for wider range of packaging formats, catering to customers’ F&B and FMCG brands in regional markets.
As of the first half of FY21,90% of the group’s sales are contributed by the F&B segment. Daibochi recorded a turnover of RM318mil in the first half, which was higher by 2.1% y-o-y. FPP sales in Malaysia, which made up 56.1% of group revenue, increased 3.7% y-o-y from RM172.2mil previously.
Revenue from exports, constituting the balance RM139.6mil or 43.9% of group revenue, were largely unchanged. Net profit rose 8.9% y-o-y to RM27.9mil, although profit margins were compressed by higher raw material prices and freight costs in the second quarter.
“We can mitigate a substantial portion of these cost hikes as we have cost pass-through mechanisms with key MNC clients.
“We are also able to leverage on Scientex’s substantial access to the global resin market, thus ensuring a stable supply of raw materials for our production, ” according to Low.