INVESTMENT HIGHLIGHTS

• 9MFY17 results deemed largely in-line

• PBT margin improvement showing in 3QFY17

• Much potential seen in Myanmar

• Maintain BUY and TP of RM2.51 per share

9MFY17 results deemed largely in-line. Daibochi’s 9MFY17 earnings are broadly within expectation, making up 65.7% of our full year estimate and 65.6% of consensus’. We are expecting a stronger 4Q in anticipation of new contracts from Daibochi’s Indonesian customers. The company has announced an interim dividend of 1.15 sen, bringing YTD DPS to 3.47 sen.

9MFY17 earnings unchanged yoy at RM18.6m as the marginal sales improvement is offset by rising raw material costs and a supply chain disruption at one of its customer’s facilities in the first half. We believe that the coming quarter should be stronger due to potential new contracts and margin improvement in the Malaysia plant which is attributed to improving wastage control, better operational efficiency and sales mix.

PBT margin improvement showing in 3QFY17. 3QFY17 earnings were up by 29.5%yoy to RM7.8m as sales climbed by 8.5% to RM102.0m with better operational efficiency. The improvement in operational efficiency is seen in the Malaysia plant as well as the maiden contribution from Daibochi Packaging (Myanmar) Co Ltd (DPM), which has started since July 1. Daibochi’s plant Malaysia recorded PBT margin of 9% during the quarter as compared to DPM’s 28.6%. Comparatively, the PBT margin for the Malaysia plant improved by 1.4ppt-yoy and 1.3ppt-qoq. We believe that the better PBT can be sustained or further improved due to measures in streamlining processes as well as incorporation of more automation.

Much potential seen in Myanmar. We are still upbeat about Daibochi’s growth prospects that DPM can bring about due to the low operating costs there. We also note that DPM comes from a small base and there is much room for growth especially after obtaining the required certifications in October. In 3QFY17, DPM contributed 6.3% to group sales and 17.6% to Daibochi’s PBT. On top of that, the company is negotiating for new FMCG contracts there.

Maintain BUY with TP of RM2.51. We make no changes to our assumptions and earnings pending an analyst briefing later today. We maintain our BUY recommendation with a TP of RM2.51, which is based on the dividend discount model with a terminal growth rate of 3.2%.

Source: MIDF Research - 21 Nov 2017