• Indonesia potentially the next export market

• Myanmar arm to contribute from FY18 onwards

• Expecting stable profit margins going forward

• Maintain NEUTRAL with a higher TP of RM2.54

Indonesia potentially the next export market. Daibochi’s plan to increase its exports will continue at a higher gear in FY17. Besides its existing markets like Australia, New Zealand, Singapore and the Philippines, it is at a mature stage of negotiation with two Indonesia multi-national companies (MNCs) to supply packaging products to them. The signing of the agreement with the Indonesian customers could increase sales by RM20-25m for FY17. The signing of this deal will open up opportunities in Southeast Asia’s most populous market.

Myanmar arm to contribute from FY18 onwards. Discussions and commercial negotiations with the Myanmar Investment Commission is expected to take three to six months. To recap, Daibochi has signed an agreement to buy 60% in Myanmar Smart Pack (MSP) for USD6.8m (about RM30m). MSP is one of the leading flexible consumer packaging manufacturers with a 10% market share in the personal care products segment in Myanmar. We estimate that MSP could contribute approximately 5% to Daibochi’s FY17 PBT and 18-20% to FY18 PBT as the deal is slated for completion in 2H17. We understand that MSP is also growing fast organically and could be getting more contracts from new clients. Both parties have started the process of looking at synergising the operations and marketing aspects of the Myanmar arm.

Profit margins should stabilise going forward. Labour shortage should not be an issue for Daibochi going forward as it has received approvals to hire new foreign workers. With the acquisition of MSP, Daibochi would be able to tap into the Myanmar labour market to hire locals there. Workers who meet the criteria to work in the Malaysian plant could also be arranged to be transferred here. As for its material costs, Daibochi is expected to save RM1.6m from the new blown film manufacturing machine that was installed in the newly expanded Plant 2. Despite the recent increase in raw material prices, management noted that 80% of prices from its suppliers stay relatively stable. All in, we do not foresee a huge spike in raw material costs and operating costs this year.

Higher exports to boost gross profit margin. In fact, we expect its gross profit margin to improve by around 1ppt in FY17 as the company increase its export sales. The growth in the export segment should come from the higher demand in its existing markets as well as new potential markets like Indonesia and Myanmar. As it is, export sales had already accounted for 55% the group’s FY16 revenue compared with 52% in FY15.

Maintain NEUTRAL with a higher TP of RM2.54. We are maintaining our NEUTRAL stance with a higher FY17 TP of RM2.54 per share based on the dividend discount model. We have incorporated new sales growth potential that will enhance its bottomline from FY18F-FY21F. We are also introducing our FY18 estimates.

Source: MIDF Research - 28 Feb 2017