INVESTMENT HIGHLIGHTS

• 9MFY18 earnings missed expectations

• PATAMI for 9MFY18 declined by 6.4% to RM16.8m

• PATAMI cut by 16.0%/16.6% to RM23.1m/RM25.7m for FY18F/FY19F

• Share swap with Scientex

• Under Review pending more details (previously RM2.00)

9MFY18 earnings missed expectations. Daibochi’s earnings were below estimates, making up 61% of ours and 57% of consensus’ full year estimates. It has announced an interim dividend of 1.0sen, bringing cumulative 9MFY18 dividend to 2.85sen, which missed our expectation of 4.6sen.

PATAMI for 9MFY18 declined by -6.4%yoy to RM16.8m even though revenue rose by +13.2%yoy to RM320.3m. The decrease in net profit for the period can be attributed to higher raw material costs and forex loss amounting to RM2.9m. Growth in revenue is primarily due to the higher sales to Malaysia (+9.6%yoy) and Australia (+1.4%yoy) as well as the additional contribution from Myanmar.

3QFY18 net profit dropped by -21%yoy to RM5.7m mainly because of higher raw material costs and forex losses. The drop in profit can also be attributed to lower PBT contribution from Daibochi Myanmar that plunged by -72%yoy to RM0.5m from RM1.85m in 3QFY18. However, revenue for the quarter rose to the highest at RM109.2m, which is higher +7.0%yoy and +2.7%qoq due to higher demand in Malaysia and Australia.

Sequentially, 3QFY18 net profit rose +22.4%yoy as revenue increased by +2.7%yoy mainly due to lower forex losses of RM1.4m compared to RM2.2m in 2QFY18. The increase in revenue is mainly because of higher local sales that grew +4.3%qoq. Exports sales stood at 56.4% for the quarter compared to 58.8% as of end-June.

Challenging near-term outlook for Daibochi Myanmar. Sales contribution from Daibochi Myanmar dropped by - 27.9%qoq to RM6.5m due to the 15% depreciation of Myanmar Kyat against USD. The steep depreciation of Myanmar Kyat led to weak consumer sentiment in Myanmar. Meanwhile, exports from Daibochi Myanmar to the Malaysia plant was halted due to sales tax imposed on the imports of packaging materials that constrained sales growth in the near future. Operationally, there is a slight increase in labour cost in Myanmar that is in-line with the annual wage adjustment.

PATAMI cut by -16.0%/-16.6% to RM23.1m/RM25.7m for FY18F/FY19F to reflect the weaker than expected performance from Myanmar and slower than expected recovery in profit margin.

Share swap with Scientex. Daibochi has also announced that 14 shareholders (including family members of the founder) are signing a heads of agreement (HOA) to swap a collective of 139.1m Daibochi shares representing 42.4% of Daibochi’s share base for RM222.5m, which will be fulfilled through the issuance of new Scientex Bhd shares at the ratio of 5.5 Daibochi shares for 1 Scientex share. The purchase consideration by Scientex values Daibochi shares at RM1.60 per unit and at a historical price-to-earnings ratio (PER) of 20x and price-to-book value (PBV) of 2.62x. Both are higher than Daibochi’s 10 year average of PER at 17.1x and PBV at 2.3x. On the flip side, the offer price represents a 18.8% discount to Daibochi’s five-day weighted average share price of RM1.97. The PER of 20x is higher than its comparable peers’ average of approximately 17.8x.The HOA will take effect for 2 months or longer if mutually agreed upon, during which the conditional share sale agreement (CSSA) has to be carried out. The deal is subject to approval from Scientex shareholders, Bursa, relevant authorities as well as the completion of a due diligence on Daibochi. Once the CSSA becomes conditional, Scientex will have to extend a mandatory take-over offer to acquire the remaining shares and warrants not already held by Scientex. Scientex intends to maintain Daibochi’s listing status, Daibochi’s management and employees in the event the CSSA becomes unconditional.

Under Review pending more details (Previously NUETRAL with TP of RM2.00). We put Daibochi Under Review pending more details of the latest corporate exercise during the upcoming briefing on Friday.

Source: MIDF Research - 15 Nov 2018