This article first appeared in The Edge Financial Daily on December 19, 2018

DPI Holdings Bhd
Fair value at 28 sen: Aerosol spray paints maker DPI Holdings Bhd is seeking a listing on Bursa Malaysia’s ACE Market in early January, raising RM31.6 million at a market capitalisation of RM121.7 million, with most of the proceeds allocated for business expansion. DPI Holdings primarily develops, manufactures and distributes aerosol spray paints through the own brand manufacturing (OBM) and the private label manufacturing services (OEM). The group also trades industrial aerosols, solvents and thinners.

On its reliable track record, DPI Holdings had developed, manufactured and distributed more than 300 colours under its house brands — Anchor, DPI and Kromoto. It also has the ISO 9001:2015 Quality Management System certificate, safeguarding the consistent provision of quality-assured aerosol products.

Of the RM31.6 million proceeds raised through an initial public offering (IPO), 55% will be used to build a new factory with four new fully-automated aerosol filling lines scheduled to be completed in the second half of 2019 (2H19); 13% for the upgrading of four aerosol filling lines in an existing plant to fully automated lines.

After the completion, these are expected to boost annual capacity from 9.7 million to 20 million aerosol cans in 1H20 — the main driver of its core business. Additionally, the upcoming facilities are expected to generate cost-saving benefits as well as improved efficiency as the upgrade to fully automated filling lines will streamline the manufacturing while also overcoming previous capacity constraint issues.

Going forward, the aerosol paints market is expected to grow in tandem with rising demand for aerosol paint products, spurred by continuous urbanisation and motorisation.

Despite yielding a lower margin than that of the OBM business, we believe there are many upside possibilities for DPI Holdings’ OEM business, particularly for its export market (18.3% of financial year 2018 [FY18] revenue; a two-year compound annual growth rate of +9.7%). This is on account of the high compliance cost for manufacturing aerosol products in developed countries, prompting them to outsource their production to emerging countries to minimise cost.

DPI Holdings has also indicated its plans of venturing into new markets such as Vietnam and Myanmar to take advantage of their booming urbanisation and motorisation. We forecast revenue growth of 0.2% to 23.2% for FY19 and FY20 respectively, factoring in possible delays in the progress of constructing the new factory.

All in, we are forecasting DPI Holdings to register a net profit of RM9 million and RM10.3 million for FY19 and FY20 respectively, on the back of a similar gross profit margin of about 33%.

Notably, the company has minimal to no borrowings since FY16, hence no finance costs were incurred. This led to a healthy balance sheet with a net cash position of RM18 million as of FY18 assumption, which can be tapped to spur further growth. In view of a limited upside potential, DPI Holdings is a “not rated” stock. The main risk to our recommendation is a higher-than-expected earnings growth. — Kenanga Research, Dec 18