Daibochi PPI - Solid but has limited upside

INVESTMENT MERIT

- Best ever quarterly results.  DAIBOCI announced a commendable set of 3Q12 results last week with its 9M12 net earnings rising 30% YoY to RM18.4m despite a YoY marginal drop in its top line. The marginal drop in revenue was solely due to lower sales from its property segment, which was in line with management’s intention to phase out its property division. In contrast, DAIBOCI’s packaging unit posted a 4% YoY revenue growth mainly attributed to its increased coffee packaging sales from its subsidiary in Australia. 

- Higher dividend payout.  The group is committed to a higher minimum dividend payout policy of 60% from 50% previously (it has been paying out dividends quarterly since FY09). For 9M12, DAIBOCI declared a 9.8 sen NDPS, implying an earnings payout of 60.3%. Assuming DAIBOCI were to declare a 60% payout for FY12-13E, we are expecting the group to declare a total of 12.8 sen and 15.3 sen for FY12-13E NDPS, yielding 4.8% and 5.7% respectively. 

- Positive outlook.  After achieving its best ever quarterly results, management is guiding for a stronger 4Q12 results and a better FY13E performance. The bullish outlook is supported by DAIBOCI’s favourable product mix, sustainable sales growth from Australia and its continued emphasis on wastage control and cost  efficiencies. As such, we are projecting FY12E and FY13E earnings to improve 20% p.a. to RM24.2m and RM29.0m, respectively. 

- To grow new products.  Its business ventures into medical glove, E&E and tobacco packaging in the past 24 months are showing good progress as DAIBOCI has started to receive commercial supply orders. The sales orders are still insignificant at this early stage, but we believe that this is a potential growth area for the next few years.

- All is well but almost fairly valued. We value the stock at a new fair value of RM2.81 based on the industry’s CY13 PER of 11x on its FY13E earnings. The share price has rallied strongly in the past four months and hit an all-time high of RM2.67, thus limiting its current upside to just 8%. Nonetheless, we advise investors to accumulate the stock on weakness, especially at its support level of RM2.49.

SWOT

- 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 hit the  plastic packaging industry outlook.

TECHNICALS

- Resistance: RM2.68 (R1), RM2.75 (R2)

- Support: RM2.49 (S1), RM2.40 (S2)

- Comments:  For the immediate term, Daibochi looks toppish amid overbought signals on the 14-day Stochastics and RSI indicators. However, as the overall uptrend remains intact, look to buy on a correction towards the RM2.49 support level.

BUSINESS OVERVIEW

Daibochi Plastic & Packaging Industries (“DAIBOCI”) was established in 1972 and is a leading one-stop flexible plastic packaging (FPP) solution provider for world-renowned  customers in the F&B, FMCG and Specialty industries. Most of  DAIBOCI’s clients are MNC-eccentric companies like Nestle, BAT and TESCO with more than 85% of its revenue being generated from the F&B segment. However, the group’s business segments are segregated into Packaging unit and Property Development. In contrast to the  other local FPP players, more than 60% of DAIBOCI’s revenue are 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.  The group is gradually phasing out its property division (projects in Melaka) and aims to  focus only on the packaging industry in the future.

Source: Kenanga