Daibochi PPI - Strong and defensive

INVESTMENT MERIT

- Limited upside, for now.  PFF stocks have enjoyed a higher valuation of 11x PER on average for CY13 of late as a result of a rerating of the sector following the acquisition of GWPB’s units by Scientex early this month. However, this barely affected DAIBOCI as the stock had already rallied strongly by 31% in the past four months prior to this. The stock is currently trading at 10.8x FY13 PER, in line with the sector average PER of 11x, thus providing a limited upside at this juncture. While waiting the  release of its 3Q12 results next week, we have no rating for the stock for now.

- Better margins in 1H12.  DAIBOCI registered a 1H12 revenue of RM139.3m, which declined marginally from RM140.9m in 1H11. Notwithstanding, the 1H12 net earnings rose 19.4% to RM11.5m from RM9.6m a year ago. The improved earnings were mainly due to 1) favourable product mix and continuing emphasis on wastage control and cost efficiencies and 2) the raw material prices were lower in 2Q12 as compared 2Q11.

- Higher dividend payout.  The group has revised its minimum dividend payout ratio to 60% from 50% previously in conjuction with its 1-for-2 bonus issue exercise. In 1H12 (pre-bonus issue), DAIBOCI paid 9.5 sen NDPS, implying an earnings payout of 62.7%. Assuming DAIBOCI were to declare a same 65%  payout ratio, the group will be paying a 4.1 sen diluted NDPS in 2H12, totaling up to a FY12 NDPS of 13.5 sen and yielding 5.4%. 

- Resilient MNC clients base.  DAIBOCI posseses a strong MNCcentric clientele which are mostly from the F&B, FMCG and Specialty sectors. DAIBOCI is the sole local supplier to Nestle’s Chembong Confectionary Factory and Kraft biscuits and is also the largest supplier of Milo packaging in SEA.

- Diversifying into Non-F&B packaging business.  DAIBOCI has continued its testing and certifications targeting medical and electronic packaging. In FY11, DAIBOCI and Lubrizol, a US-based specialty chemical company, had worked together and produced Tribosafe, an electronic packaging.

SWOT ANALYSIS

- Strength:  The only FPP player equipped with its own in-house cylinder-making and one of the few with materialising and sealing capabilities for quality assurance.  

- Weaknesses: Higher than expected raw material cost for industrial packaging, resulting in a lower profit margin.

- Opportunities:  Expanding business networking with medical and E&E companies for new sources of business.

- Threats: Gloomy economic condition could directly hits the plastic packaging industry outlook.

TECHNICALS

- Resistance: RM2.67 (R1), RM2.80 (R2)

- Support: RM2.50 (S1), RM2.42 (S2)

- Views: Bullish in the ST, MT and LT.

Comments: The company trading within a MT uptrend channel, a ST pick up can be expected until it reaches RM2.67 before it faces resistance. Further breakout will lead to (R2) or otherwise back to support level before rebounding.

BUSINESS OVERVIEW

Daibochi Plastic & Packaging Industries (“DAIBOCI”) was established in 1972 and is a leading one-stop flexible plastic packaging (FPP) solution providers for world renowned customers in the F&B, FMCG and Specialty industries. Most of  DAIBOCI’s clients are MNC-eccentric companies which includes Nestle, BAT and TESCO while more than 85%  of its revenue is generated from the F&B segment. However, the group’s business segments are segregated into Packaging unit ant Property Development. As opposed to the other local FPP players, more than 60% of DAIBOCI’s revenue is domestically driven. 

BUSINESS SEGMENTS

- Packaging.  The core contribution to the group’s earnings, contributing 94% of its FY11 revenue. 

DAIBOCI offers a wide range of FPP solutions for varius applications:

- High Performance: Coffee, Nuts, Potato Chips

- Cost Effective Barrier: Snacks, Biscuits, Wafers, Cakes

- General Packaging: Noodels, Outer Pack, Wafers, Biscuits

- Speacialty: Labelling, Ice-Cream, Frozen Food, Cereal Peel Seal, Tobacco, Pet Food 

- Property Development.  Through its associate Skyline Resource S/B, DAIDOCI has ventured into the property development of residential and commercial buildings in Melaka. However, contribution from this segment is minimal as compared to packaging. 

Source: Kenanga