Daibochi’s earnings hampered by higher operating costs

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Daibochi Plastic and Packaging Industry Bhd
(Feb 12, RM4.63)
Downgrade to sell with a lower target price (TP) of RM3.71:
We are downgrading Daibochi to “sell” (from “neutral”) with a revised financial year 2015 (FY15) TP of RM3.71 per share (from RM4.61).

Our valuation is based on the dividend discount model. Our downgrade is also premised on a lower dividend payout which diminished the stock’s attractiveness as a dividend play.

Revenue for FY14 rose 11% year-on-year (y-o-y) to RM344.5 million. The growth was attributable to export contributions from new multinational company customers in the food and beverage sector.

Contributions from the group’s export sales also increased by 10% y-o-y to 50%.

In FY14, the group’s earnings dropped 13.5% y-o-y to RM23.7 million. The group initially expected to post stronger results in the second half of FY14. However, the group was adversely impacted by the higher raw material prices of polyethylene and polypropylene resins and films.

Further impacting its sales were the electricity tariff hikes as well as the larger wage bill due to the implementation of the minimum wage.

Due to the higher operating costs in FY14, the group’s net profit margin for FY14 declined 2% y-o-y to 6.9%, the lowest since 2010.

We have yet to see the effects of the implementation of the group’s energy saving plan.

Daibochi declared its fourth tranche tax-exempt dividend for FY14 of 3.5 sen per share, translating into a cumulative FY14 dividend of 13 sen per share (62% payout ratio). This came in short of our expectation of 16 sen based on higher earnings per share and a higher payout ratio of 65%.

Due to the higher operating costs and lower net profit margins, we are revising downwards our earnings forecasts for FY15 by 11% and FY16 by 4% to RM27.1 million and RM26.3 million respectively. — MIDF Research, Feb 12

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This article first appeared in The Edge Financial Daily, on February 13, 2015.