Investment Merits

• Highly recognized brand name. DPI Holdings Berhad (DPI) is primarily involved in developing, manufacturing, filling, and packaging of aerosol products. DPI has over 45 years in aerosol cans industry, the business has grown from a small company to the current market leader (25%) in Malaysia’s spray paint market. Its “Anchor” spray paint brand name and packaging has been prevalent and well-known in Malaysia, the Group’s products can be easily found in hardware stores, DIY stores, and shopping malls.
   
• Advanced and versatile product portfolio. DPI is immensely focused in product innovation and development where it would launch 12 – 13 new colours every year as well as new products with specific properties such as clear coating with a sparkling effect and clear finishing coating with a matte effect to fulfil demand from customers. Besides, existing products formulation has been improving and adding value to customers with new features namely, white paint that glows in the dark for safety marking purposes, improved paint’s thickness to absorb more light, and improved colour strength for better colour impartation.
   
• Fundamental counts. DPI recorded RM12m revenue (+19.3% YoY) and adjusted operating profit RM2.3m (+98.6% YoY) in 2QFY20 on the back of higher sales and lower cost of raw materials. Also, DPI had achieved commendable profit margins along the years where it recorded 33% average gross profit margin (GP), 21.25% average profit before tax margin (PBT), and 15% average net profit margin (PAT) from FY2016 to FY2018. Closer to date, the Group’s 1HFY20 GP margin, PBT margin, and PAT margin improved slightly to 37.62%, 23.87%, and 17.41% respectively. Other than that, DPI also recorded respectable adjusted return on equity of 28.00%, 36.50%, and 20.08% for FY2016, FY2017 and FY2018 respectively. Notably, the profits derived since FY2016 with zero debt. However, its prospect was overshadowed by the gloomy outlook arising from COVID-19 which caused its share price to tumble, trading at slight premium to cash per share, RM 0.10 sen and significantly below IPO price of RM0.25. For the past financial years (FY17, FY18 and FY19), DPI had generously rewarded its shareholders with dividend per share of 2.14sen, 1.23sen, and 0.04sen respectively, translating into dividend yield of 17.83%, 10.25%, and 3.3%.

• Plans to double capacity. Bottleneck of DPI’s production capability hinders DPI’s future business growth. This prompts the Group for imminent business expansion. Therefore, DPI is in the midst of getting authority approval with the amount of RM17.33m new plant construction. We believe the new plant construction will be commenced before FY20. The new plant will double the existing capacity to 20m cans per annum from current approximately 9.7m cans. The Group is also upgrading the existing production lines with amount of c.RM4m in order to embrace new technology and to adopt more automation. We deem the aerosol cans demand to increase upon arriving of festivals for instance Chinese New Year, Christmas, Hari Raya Aidilfitri et cetera. The other catalyst is Do-It-Yourself (DIY) culture which is prevalent in ASEAN as we have seen DIY concept chain stores are well received by consumers. Hence, we expect DPI to record higher sales amid longer operating hours in DIY chain store (day to night) compared with traditional hardware store (day to evening).

• Business is well-supported by diversified value chain and customer base. As significant parts of raw materials (>70%) are sourced locally with minimal parts (6.5%) from Thailand and Japan, DPI is unlikely to face supply shortage. It can also procure its raw materials from other alternatives. Additionally, empty aerosol cans and solvents which account more than 10% of the Group’s total purchases are come from 2 main suppliers whom it have more than 15 years relationship with DPI. On the other hand, the top 5 customers whom from Malaysia, Japan, and Australia have been dealing with DPI for more than 10 years and none of them account more than 10% of DPI’s total revenue. Likewise, DPI has more than 700 retailers & distributors in Malaysia with negligible issues in products distribution.

• Serving the right market and relatively sheltered from external headwinds. Local business accounted for 83% of total revenue in FY2019. We opine that local market has bright prospects to be served in terms of its high motorisation rate. Malaysia was ranked the second highest number of density owning road motor vehicles (two- and four-wheelers), with 897 units per 1000 population as of CY2017 in ASEAN. Aerosol spray is catered perfectly for local market as it is the main usage on vehicles. Looking forward, soaring vehicle registration (cars, commercial vehicles and motorcycles), i.e. 31.2 million units (+10% YoY) as well as higher number of licensed drivers, i.e. 16.8 million (+10.5% YoY) in 2019 warrants its future product demands with higher motorisation rate to be seen. Besides, nearly one motor vehicle per person in 2019 from 0.89 motor vehicle per person in 2017 bodes well for DPI in its future product developments and substantial business expansion as we have witnessed more unique colour mixtures were used in motor vehicles along the years.

Valuation & Recommendation

• We derive a fair value of RM0.19 for DPI. Our valuation is pegged at 12x FY21F EPS of 1.56sen. Our target PE assigned is based on upcycle valuation of small-cap players in local bourse. We believe our valuation is prudent amid unforeseen market uncertainty in the coming 2nd half of 2020. Still, our fair value on the stock renders 58.3% upside from current closing.

Risk factors

• Subdued consumer sentiment to impact buying activity during lockdown period and post pandemic.

• Subject to price fluctuations of raw material.

• Unable or delay to get approval from the relevant authorities on new plant construction.

• Expose to sudden and unexpected disruptions of the manufacturing plant.

• Dependency on the supply of foreign labour.

Source: JF Apex Securities Research - 17 Apr 2020