INVESTMENT MERIT

- A strong 1Q13. We attended the post-1Q13 results briefing last week where more details of the results were revealed. The group posted a strong net profit of RM7.1m, which was up by +13.8% QoQ although its revenue slid slighly by -0.5% QoQ to RM73.4m. The 1Q13 operating profit rose 12.8% QoQ as the group benefited from: 1) a continued improvement in wastage control, 2) relatively stable raw material prices and 3) a favorable sales mix as Daibochi Australia’s sales expanded by 8.7% compared to that of 4Q12. Going forward, the down-gauging of its film from the current four layers to the thinner and more cost effective two-layer film and its higher speed in production, which is 350m/minutes compared to 300m/minutes a year-and-a-half ago could further support its margin expansion. There was also no cost pressure arising from the minimum wage policy as well as from the new anti-dumping duties being imposed on OPP film imports.

- More contracts secured! We foresee a stronger catalyst to drive revenue growth in 3Q13 as DAIBOCHI has recently secured major contracts from its ASEAN and Australia customers. 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 more than 10% and the PAT to grow more than 20% this year due to the favorable sales mix.

- The expansion plan. Its new plant under construction will be another catalyst as the company aims to boost up its revenue from FY12’s level by 20% once the production line starts in FY14. The group is expected to invest RM25.0m capex in FY13 encompassing land purchase, plant construction and three new machines.

- Higher dividend payout. In addition, the group is committed to a higher minimum dividend payout policy of 60% from 50% previously. In 1Q13, DAIBOCI declared a 4.0 sen NDPS. Assuming DAIBOCI were to declare a 60% payout for FY13E, we expect the group to declare a 11.3 sen NDPS in the remaining quarters, totaling up to 15.3 sen for FY13E NDPS, which will yield 5.7%. However, at its current share price of RM3.30, the stock is already fairly valued at 12.7x FY13 PER.

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: RM3.39 (R1), RM3.50 (R2)

Support: RM2.89 (S1), RM3.06 (S2)

Comments: DAIBOCHI has just confirmed a “Bullish Pennant”chart pattern. The overall technical picture remains bullish, though near term upside appears limited to another 10 sen. The indicators also seem stretched; hence, traders should wait for a retreat before buying into the stock.

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. The group’s business segments are segregated into the 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. This is the core contributor 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