INVESTMENT HIGHLIGHTS

• Adjustment in financial year end

• Acquisition of Mega Printing & Packaging to be decided in an upcoming EGM

• Change in valuation method due to dividend policy update

• Maintain SELL with an adjusted TP of RM1.52 (from RM1.55 previously)

Adjustment in financial year end. Daibochi has announced the change in its financial year end to July 31 from December 31 previously. It has announced its one-month ended April 30, 2019 results due to the change in financial year end. There is no comparable period due to this change.

Acquisition of Mega Printing & Packaging (MPP). The EGM to approve the acquisition of MPP will be held on July 11 (Thursday). We think that the acquisition price of RM125m is fair and provides synergy to the enlarged entity.

Change in valuation method due to dividend policy update. Historically, Daibochi has been generous with its dividend payout that ranged from 50% to 60%. Dividends were also paid out in interims. Going forward, we expect lower payout as the company has to conserve cash to fund its expansion. As such, we believe that the dividend discount model, which was used previously, may not be the best way to value the company as we anticipate lower payout ratio and less frequent payments going forward. We have changed our valuation method to price-to-earnings ratio (PER), which is widely used for manufacturing companies.

Maintain SELL with an adjusted TP of RM1.52 (from RM1.55 previously). Our TP is based on 19.0x FY20F EPS of 8.0 sen. The 19.0x PER is based on Daibochi’s long-term average. We believe that the valuation of the stock is unattractive at this moment. Furthermore, we have incorporated contribution from MPP to better reflect Daibochi’s future earnings prospects (in FY20F and FY21F) as we believe that the acquisition will likely go through due to the synergies that the enlarged company can enjoy. We have also updated our FY19F numbers to reflect the 19-months period due to the change in financial year end.

Source: MIDF Research - 26 Jun 2019