This article first appeared in The Edge Financial Daily on November 22, 2017

Daibochi Plastic and Packaging Industry Bhd
(Nov 21, RM2.23)
Maintain reduce with a higher target price (TP) of RM1.88: Daibochi Plastic and Packaging Industry Bhd’s revenue for the first nine months of financial year 2017 (FY17) rose 0.8% year-on-year to RM283 million and its quarterly revenue exceeded RM100 million for the first time ever. Higher raw material cost was offset by lower waste and better operational efficiency. The third interim dividend per share (DPS) of 1.15 sen was in line with our expectations. Year-to-date DPS is at 3.47 sen or 63% net dividend payout ratio.

Daibochi has revised its dividend policy to exclude the earnings from its Myanmar joint venture (JV) from distributable income — it will now pay at least 60% of net profit excluding earnings from Myanmar. Our FY17 to FY19 DPS forecasts already assume 60% net dividend payout ratio excluding Myanmar JV earnings. We understand the company is not allowed to take out money from the Myanmar JV over the next two years.

Daibochi’s 60%-owned Myanmar JV started operations in the third quarter of FY17 (3QFY17) and the JV recorded RM6.5 million revenue and RM1.95 million profit before tax (PBT) in the quarter. The Myanmar PBT margin was 29% compared with only 9% for Daibochi’s Malaysia operations. Myanmar’s higher PBT margin allows the company to do the lower-profit-margin business in Malaysia, which Daibochi did not want to do in the past. In 3QFY17, the Myanmar JV contributed 19% of the group’s PBT, which was quite an achievement in its first quarter of operations.

We remain long-term positive about Daibochi’s move to Myanmar. The company has the first-mover advantage in this country. Myanmar currently does not have many multinational corporations (MNCs) but we believe it would only be a matter of time before more MNCs set up operations in Myanmar. Daibochi has been working with major MNCs in the region and as such, we believe the Daibochi JV has a strong chance of getting the MNC business in Myanmar.

We maintain our earnings per share forecasts but raise our TP to RM1.88 as we roll forward to FY19. — CIMB Research, Nov 20