DPI Holdings Berhad (DPI), an aerosol spray paints maker, is seeking listing on ACE market in early-Jan, raising RM31.6m at a market cap of RM121.7m, with bulk of the proceeds allocated for business expansion. Though we like the company for its growth opportunities coupled with on-going expansion plans, which are backed by superior net cash position, it is a Not Rated due to limited upside potential in near-to-medium-term. The stock is fairly valued at RM0.280, based on 13x FY20E PER.

Established aerosol manufacturer with more than 30 years track record. DPI is primarily engaged in the development, manufacturing and distribution of aerosol spray paint through: (i) Own brand manufacturing (OBM) and (ii) Private label manufacturing services (OEM). The group also trades industrial aerosols, solvents and thinners. Standing testimony for their reliable track record, DPI has successfully developed, manufactured and distributed more than 300 colors under its in-house brands namely Anchor, DPI and Kromoto while being equipped with ISO 9001:2015 Quality Management System certificate, which safeguards the consistent provision of quality-assured aerosol products.

Expansion plans as growth drivers. Of the RM31.6m proceeds raised through IPO, 55% will be utilised for the construction of a new factory with 4 new fully-automated aerosol filling lines scheduled to be completed in 2H19. Moreover, 13% of the IPO funds will be employed for the upgrading works of four aerosol filling lines in existing plant to fully-automated lines. Post-completion, these are expected to boost annual capacity to 20.0m aerosol cans, from 9.7m, in 1H20 which is the main driver for its core business. Additionally, the upcoming facilities are expected to generate cost-savings benefits as well as improved efficiency as the upgrade to fully-automated filling lines will streamline the manufacturing process while also overcoming previous capacity constraint issues.

Ample export opportunities. Going forward, the aerosol paints market is expected to grow in tandem with rising demand for aerosol paint products, which is spurred by continuous urbanisation and motorisation. Despite yielding lower margin than OBM business, we believe there are plenty of upside possibilities for DPI’s OEM business, particularly for its export market (18.3% of FY18 revenue; 2-year CAGR of +9.7%). This is on account of the high compliance cost for the manufacturing of aerosol products in developed countries, which prompts them to outsource their production to emerging countries as a cost minimization solution. DPI has also indicated its plans of venturing into new markets such as Vietnam and Myanmar to take advantage of their booming urbanisation and motorisation.

Earnings forecast. Taking into account current capacity constraints and anticipated annual capacity boost to 20.0m cans from 9.7m cans to be achieved in 1H20, we forecast 0.2-23.2% revenue growth for FY19- 20, respectively, factoring in any possible delays in the new factory’s construction progress. All in, we are forecasting DPI to register a net profit of RM9.0m and RM10.3m in FY19 and FY20, respectively, on the back of similar GP margin of c.33%. Notably, the company carries minimal to no borrowings since FY16; hence, no finance costs were incurred. This led to a healthy balance sheet with net cash position of RM18.0m as of FY18A, which can be tapped to spur further growth expansions.

Fairly valued at RM0.280; Not Rated. DPI is offered at FY20 earnings multiplier of 12x, which is not relatively cheap given the FBMSC index is only trading at a 2-year forward mean PER of 7.2x currently. However, the offer price is justified by DPI’s capacity expansion plan to propel earnings. We value the new issuance at 13x FY20 PER, which is the blended PER of four similar peers, namely SGX-listed Samurai, CCM, SAMCHEM and LUXCHEM as well as FBMSC, to derive a fair value of RM0.280 against its IPO issue price of RM0.250. In view of limited upside potential, DPI is a Not Rated stock. Main risk to our recommendation includes higher-than-expected earnings growth.

Source: Kenanga Research - 18 Dec 2018