(Sept 26, RM1.75)
Upgrade to neutral with an unchanged target price (TP) of RM1.52: Daibochi Bhd’s results for the 19 months ended March in calendar year 2019 (seven quarters for financial year 2019 [FY19]) were lower than our 19-month estimates, making up 85% of our estimate and 55.9% of the consensus. The negative deviation can be attributed to one-off merger and acquisition costs of RM6.4 million and write-down of inventories amounting to RM11.4 million. No dividend was announced for the quarter but the cumulative dividend per share came to 3.35 sen for the 19-month period.
Its net loss of RM300,000 recorded for the quarter was mainly due to inventory write-down. On top of that, the company also incurred one-off expenses for the acquisition of Mega Printing & Packaging Sdn Bhd (MPP). However, revenue for the quarter was a record high for Daibochi at RM123.3 million, which was an increase of 11.2% compared with the quarter ended April 30.
During an analysts’ briefing, the management shared some of its plans to expand the top line through selling more products to existing clients and improve margins through cost controlling measures such as the consolidation of its headcount (from 936 to 770 at Daibochi), improved inventory management and replacement of less efficient machines with better ones. Besides that, they have also improved the floor plan of the plants for a better process flow. They also shared that Daibochi will continue to manufacture more complicated products while MPP will focus on simpler products. While we laud the management’s active measures in implementing plans to improve operational efficiencies and to boost sales, we think that the impact on its financials may be gradual. Hence, we maintain our FY20 and FY21 earnings estimates at this juncture as we believe that the transformation of the group may take time. We have incorporated MPP’s contribution into our forecasts. We also do not rule out more merger and acquisition (M&A) activities in the future.
We upgrade our call to “neutral” from “sell” with an unchanged TP of RM1.52. Our TP is derived from 19 times price-earnings ratio of forecast FY20 earnings per share of eight sen. Due to the correction in share price of about 26% since our “sell” recommendation in May, we think that the downside risk may be limited as most of the housekeeping has been done at the group. However, its valuation remains considerably high now. Upsides for the company include better-than-expected synergies from M&A and faster-than-expected growth. Downside risks include a slower-than-expected turnaround and expansion. Its dividend yield is expected to be 1.4%. — MIDF Research, Sept 26