INVESTMENT HIGHLIGHTS

• FY16 earnings broadly in-line

• 4QFY16 earnings declined -10%yoy to RM5.9m

• Plant expansion to offset hike of overheads

• Maintain NEUTRAL with an unchanged TP of RM2.14

FY16 earnings below expectations. Daibochi’s FY16 net profit of RM24.5m (-8.2%yoy) accounted for 92% of our full year assumption. This is due to margin compression attributable to higher operating costs as a result of labour shortage, higher utilities bill and a less favourable product mix. Revenue climbed by +7.6%yoy to RM371.2m boosted by both local (+2.1%) and overseas (+12.6%) sales. Notably, export sales now account for 55% of the group’s total revenue compared to 52% a year earlier.

4QFY16 earnings declined -10%yoy to RM5.9m even though revenue climbed by +8.7% to RM90.36m due to higher operating costs from labour shortages. However, the management has received approval to hire foreign workers and the first batch of the new hires has arrived in January. The company expects recovery in the labour issue as the remaining foreign workers are expected to join in the subsequent months. Nonetheless, we expect profit margin to stay under pressure in the short term due to the initial training period before normalising.

Plant expansion to offset hike in overheads. The expansion of Daibochi’s plant 2 was completed in 4QFY16, adding the gross floor area by 60,000sqft to 140,000sqft. The blown film manufacturing machine in plant 2 has also been commissioned and that will increase its blown film capacity to 5,000MT from 1,800MT per year. As for FY17, Daibochi has set aside RM11.5m for the purchase of new machinery (a printing machine and laminator) and other upgrades. New factory expansion could improve Daibochi’s operating efficiency and offset the rising overhead costs so that it could maintain its profit margin.

Venture into Myanmar on track. Meanwhile, Daibochi has submitted its memorandum of agreement to jointly own and operate consumer flexible packaging plant in Yangon. The company estimates to get approvals from the relevant authorities in the next three to six months. Daibochi and its partner have been working to set up new sales and marketing teams as well as production lines from existing customers. Both parties are also enhancing its production capacity and efficiency. We have not factored the potential earnings from this venture into our assumptions.

Impact on earnings. We are maintaining our earnings estimates at this juncture pending the analyst briefing later.

Maintain NEUTRAL with an unchanged TP of RM2.14. We are maintaining our NEUTRAL stance with an unchanged FY17 TP of RM2.14 per share

Source: MIDF Research - 27 Feb 2017