INVESTMENT MERIT 

- Analysts Briefing highlights. We attended DAIBOCHI's analysts briefing recently and came back with a cautiously optimistic view on the stock. The group recorded a strong net profit of RM24.6m (+22.7% YoY) in FY12, albeit its top line being lower by 1.9% YoY to RM278.8m. The improvement in profitability was mainly driven by a 340bps jump in its gross margins (17.8% in FY12 against 14.4% a year ago) as the group benefited from: 1) a favourable sales mix, 2) continued improvement in wastage control and 3) the relatively stable raw material prices. While management continued to paint a bullish outlook, we believe that the new anti-dumping duties (c.12%) being imposed by the local government on imported OPP films (about half of DAIBCHI’s OPP films are imported) could pose a challenge to the group’s effort in improving its gross margins in the near term. 

- More contracts secured. Going forward, we foresee a greater scope in driving its revenue growth with ASEAN and Australia being the key areas of focus. In fact, DAIBOCHI has already made inroads on this front, having recently secured a major contract from a regional F&B player. The group’s business ventures into medical glove, E&E and tobacco packaging segments have also shown progress, and DAIBOCHI commercial supply orders have also already begun to trickle in. Even though management did not indicate the size of the respective contracts, we understand that the group is eyeing its overall local and export sales to grow by c.RM50m within a year. 

- Potential cost savings via “down-gauging”. In addition, DAIBOCHI is also in the midst of exploring avenues to enhance its efficiency, which could further support its margin improvement. The group has thus far received positive feedback from three major MNC customers for the down-gauging of its film from the current four layers to the thinner and more cost effective two-layer film. Commercial production could start as soon as 2H13, and this could be a mitigating factor to its near-term cost pressure arising from the minimum wage policy as well as the new anti-dumping duties being imposed on OPP film imports. 

- Fairly valued for now, however. Despite the abundance of positive catalysts on the horizon, its potential near term headwinds are keeping us guarded on our valuations. The group’s share price is currently trading at CY13 PER of 11.5x, which we deem to be fair. DAIBOCHI’s share price has rallied 12% since it released its earnings report on 21 Feb 2013, and we think it may be a better idea to revisit the stock should any price weakness provide us with a lower entry level, possibly closer to the RM2.60 technical support. 

TECHNICALS

- Resistance: RM2.88 (R1), RM3.00 (R2) 

- Support: RM2.60 (S1), RM2.39 (S2) 

- Comments: DAIBOCHI’s overall technical picture remains bullish although we expect some profit taking in the near term. We expect the share price to find strong buying interest at the RM2.60 resistance-turned-support and suggest that investors look to buy in at just above the aforementioned 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: Noodles, 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