INVESTMENT HIGHLIGHTS

• 1HFY18 earnings missed expectations

• 2QFY18 PATAMI fell by 7.8%yoy and 28.5%qoq to RM4.7m

• PATAMI for FY18F/FY19F slashed by -28%/-31% to RM27.5m/RM30.8m

• Downgrade to NEUTRAL from BUY with lower TP of RM2.00 (previously RM2.59)

1HFY18 earnings missed expectations. Daibochi’s earnings were below estimates, making up 30% of ours and 32% of consensus’ full year estimates. The negative deviation is caused by higher than expected raw material costs. It has announced an interim dividend of 0.8 sen, bringing YTD DPS to 1.85 sen, which missed our expectation of 6.1 sen.

PATAMI for the first half increased by 3.2%yoy to RM11.2m which is slower than the growth in revenue that was up by 16.7%yoy. Increasing sales from Myanmar and Malaysia plants were offset by higher raw material costs and unrealised forex loss amounting to RM1.5m. Exports continued to improve to 58.8% as of end-June from 55% in March.

2QFY18 PATAMI fell by 7.8%yoy and 28.5%qoq to RM4.7m mainly due to higher raw material prices and forex losses. However, revenue for the quarter rose to the highest at RM106.4m (22.5%yoy; 1.6%qoq). We expect Daibochi to pass on some of the rising raw material costs to its customers in the time to come but price revisions for some of these contracts and jobs may take time. We believe the underwhelming quarterly net profit is partially attributed to the lag in adjustment for pricing.

Daibochi Myanmar PBT dropped 33%qoq to RM1.0m from RM1.5m. This is due to the 16.3% lower sales, which is attributed to the 9-day long holiday in Myanmar during the quarter.

PATAMI for FY18F/FY19F slashed by -28%/-31% to RM27.5m/RM30.8m to reflect weaker than expected performance from Myanmar and higher raw material costs. We have also assumed lower profit margin going forward in view of the more competitive environment.

Downgrade to NEUTRAL from BUY with lower TP of RM2.00 (previously RM2.59) as we turn more cautious on the high material costs and potential further losses from Daibochi’s USD borrowings worth USD4.6m. Our valuation method, based on the dividend discount model with a terminal growth rate of 3.2%, is unchanged.

Source: MIDF Research - 17 Aug 2018