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This article first appeared in The Edge Financial Daily on May 8, 2017

Daibochi Plastic and Packaging Industry Bhd
(May 5, RM2.59)
Recommend reduce with a target price (TP) of RM1.93:
At 15% of our financial year 2017 net profit forecast, Daibochi Plastic and Packaging Industry Bhd’s first quarter 2017 (1QFY17) net profit was below our and consensus’ expectations.

A 1.32 sen interim dividend per share (DPS) was declared, below our expectations. The proposed Myanmar joint venture (JV) has been approved by the authorities; this will help Daibochi expand its presence in the Asean markets. Daibochi remains a “reduce” pending further details on the new Myanmar JV. 1QFY17 net profit is down 12% year-on-year (y-o-y) on lower foreign exchange (forex) gain. 1QFY17 revenue was up 4.9% y-o-y at RM94.1 million (1Q17 export sales was up 8% y-o-y), but net profit declined 12.3% y-o-y to RM5.5 million. This was mainly due to a lower forex gain of RM200,000 in 1Q of 2017 (1Q17) compared with RM1.4 million in 1Q16.

We estimate that average raw material costs rose 10% y-o-y in 1Q17, but this was offset by better wastage control and improved operational efficiency. The company announced its first interim DPS of 1.32 sen or 60% net dividend payout ratio, which was below our expectations.

Daibochi pays dividends on a quarterly basis and the company’s dividend policy is to pay at least 60% of its reported net profit. In 1Q17, Daibochi started supplying consumer packaging to a regional customer in Indonesia, which was a positive surprise to us.

Daibochi is also currently doing trial runs for another multinational corporation (MNC) for fast-moving consumer goods in Indonesia and targets to supply to this customer in the second half of 2017.

Last Tuesday, Daibochi announced that the Myanmar Investment Commission has approved its proposed Myanmar JV. In November 2016, Daibochi had proposed to set up a JV company, Daibochi Packaging (Myanmar) Co Ltd (DPM) with Myanmar’s Smart Pack Industrial Co Ltd (MSP). Daibochi said it plans to invest US$6.8 million (RM29.4 million) for a 60% stake in the JV, while MSP will inject its assets of plant and equipment for the balance 40% share of the JV and the US$6.8 million in cash.

The Myanmar JV should help Daibochi grow its export business in the Asean region and propel it to become one of the largest flexible packaging company in Myanmar. Daibochi also has the first-mover advantage of doing business with the MNCs. Although there are currently not many MNCs in Myanmar, we think it would only be a matter of time before more MNCs invest in Myanmar.

Daibochi’s net debt was RM27 million or 0.15 times net gearing as at end-March. After paying for the 60% stake in DPM, net debt would rise from RM27 million to RM57 million and net gearing would increase from 0.15 times to 0.3 times. However, we are not concerned about the debt level as the company’s projected operational cash flow looks strong.

We maintain our earnings per share forecasts for now pending further details on the 1QFY17 results and the Myanmar JV at the company’s briefing (last Friday). Our TP remains at a 2018 13 times price-earnings (PE) (our target PE for the packaging sector).

The stock remains a “reduce”. Derating catalysts include further operational cost pressures and slowdown in domestic sales. Upside risks to our call are stronger-than-expected export sales and Myanmar JV earnings. — CIMB Research, May 4

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