INVESTMENT HIGHLIGHTS

• FY18 earnings missed estimates

• Weak 4QFY18 due to high input costs, forex losses and one-off expenses

• Accept Scientex’s cash offer, which is deemed fair

• FY19F PATAMI cut by -10.5% to RM23.0m

• Maintain NEUTRAL with lower TP of RM1.60 (previously RM1.69)

FY18 earnings missed estimates. Daibochi’s full year PATAMI of RM15.2m was below our and consensus estimates at 66%/65% of full year forecasts respectively. The negative deviation can be attributed to slower than expected recovery in profit margin. The company had also experienced forex loss and one-off expenses from the recent merger and acquisition (M&A). It had announced an interim dividend of 0.5 sen, bringing DPS(ytd) to 3.35 sen, which is also below our expectation at 82% of estimate.

FY18 net profit declined by 42%yoy to RM15.2m although revenue climbed 10.8% to RM430.8m. This is mainly due to higher raw material costs, higher operating expenses, forex losses of RM3.27m and a one-off M&A expenses. There was also a one-off transitional cost for a new customer in Australia. Excluding the oneoff M&A cost of RM4.9m, its PBT decreased by 28.7% to RM25.5m, which is also disappointing, as it only made up 88% of our full year estimate.

Weak 4QFY18 due to high input costs, forex losses and oneoff expenses. During the quarter, Daibochi recorded a net loss of RM1.6m that included a RM0.6m cost for M&A. It registered an operating loss of RM0.4m due to high raw material costs and operating expenses. It had also incurred a one-off RM0.6m M&A cost and forex loss of RM0.4m compared to RM0.08m in the previous corresponding quarter. Myanmar PBT margin for 4QFY18 declined to 12.4% compared to 20% in 4QFY17.

Accept Scientex’s cash offer, which is deemed fair. Daibochi had received a mandatory takeover offer from Scientex for RM1.59 cash per share or through a share swap of based on a ratio of 5.535 Daibochi shares to one Scientex share to be issued at RM8.80 apiece. We deem the offer fair based on the PER and PBV that is above Daibochi’s 10-year average as well as taking into consideration the near-term challenging business environment. We think that the cash offer is a good opportunity to exit now as any synergistic benefits from the merger will take time to materialise.

Source: MIDF Research - 25 Feb 2019