KEY INVESTMENT HIGHLIGHTS

• Buying Mega Printing & Packaging Sdn Bhd (MPP) for RM125m

• Fairly-priced acquisition

• Estimates maintained pending completion of the deal

• The stock is a SELL for now due to the recent run up in share price

Buying MPP for RM125m. The acquisition of 4.5m MPP shares will be satisfied fully in cash, which will be funded through internally generated funds and/ or bank borrowings. This may increase Daibochi’s gearing level from 0.38x to up to 0.92x upon completion of the acquisition. MPP prints and manufactures flexible plastic packaging material serving mainly the food and beverage industry. MPP derives 87% of its sales from Malaysia and 13% from export markets based on it FYE18 financial statement. Based on MPP’s website, its clients include: Nestle, Mondelez, Munchy’s, Oriental Food, Snek Ku, Mamee, Power Root, Dole, 3M, Apollo, Wise and MacCoffee. MPP was set up in 1997 with operations in Melaka. Mpp has a production capacity of 264m meters per annum with a utilisation rate of 68.3% in 2018.

Fairly-priced acquisition. The expansion of Daibochi under the Scientex Group is happening sooner than expected as Daibochi has become Scientex’s subsidiary on February 19th. We understand that MPP is in similar business and the two businesses will be able to enjoy the economy of scale once merged. According to Daibochi, its capacity will increase by 33.3% to 1.06b meters per year with the addition of MPP. Moreover, MPP is in a net cash position of RM12.2m. The deal values MPP at 16.0x FY17A PER and 17.9x FY18A PER, which is a slight discount to the price tag valued on Daibochi at 20.0x FY17A PER. We deem this as fair given MPP’s smaller production capacity.

Estimates maintained pending completion of the deal. Based on MPP’s historical earnings, we estimate that the acquisition will contribute between 7% to 15% to Daibochi’s earnings upon completion depending on the financing cost and potential synergies between the two entities. We leave our estimates unchanged at this juncture as details of the funding and earnings prospects of the combined entity are sketchy. The acquisition is subjected to shareholders’ approval at a later date to be announced while the completion is slated by 3QCY19.

The stock is a SELL for now due to the recent run up in share price. Daibochi shares have shot up circa 26% after the conclusion of the MGO by Scientex while dividend yield is unappealing at 1.3%. Our TP of RM1.60 based on DDM-derived model (terminal growth of 3.2%) is unchanged for now until the upcoming earnings review.

Source: MIDF Research - 6 May 2019