KEY INVESTMENT HIGHLIGHTS

• 7QFY19 results missed estimates

• Net loss of RM0.3m recorded mainly due to inventory write down/ off

• Focus on expanding topline and control to enhance margins

• Upgrade to NEUTRAL from SELL with an unchanged TP of RM1.52

7QFY19 results missed estimates. Daibochi’s (DPP) results for the 19 months ended March CY2019 (7QFY19) was lower than our 19- month estimates, making up 85% of ours and 55.9% of consensus estimates. The negative deviation can be attributed to one-off merger and acquisition costs of RM6.4m and write down of inventories amounting to RM11.4m. No dividend was announced during the quarter but cumulative DPS came to 3.35 sen for the 19-month period.

Net loss of RM0.3m recorded for the quarter mainly due to inventory write down/ off. On top of that, the company has also incurred one-off expenses for the acquisition of Mega Printing and Packaging (MPP). However, revenue for the quarter was a record high for DPP at RM123.3m, which is an increase of 11.2% compared to the quarter ended April 30.

Focus on expanding topline and control to enhance margins. During the analyst briefing, management has shared some of its plans to expand topline through selling more products to existing clients and improve margins through cost controlling measures such as consolidation of headcount (from 936 to 770 at DPP), improved inventory management and replacement of less efficient machines with better ones. Besides that, they have also improved the floor plan of the plants for a better process flow. They also shared that DPP will continue to manufacture more complicated products while MPP will focus on simpler products. While we laud the management’s active measures in implementing plans to improve operational efficiencies and to boost sales, we think that the impact on its financial may be gradual. Hence, we are maintaining our FY20F/FY21F earnings estimates at this juncture as we believe that the transformation of the group may take time. We have incorporated MPP contribution to our forecast. We also do not rule out more M&A activities in the future.

Upgrade to NEUTRAL from SELL with an unchanged TP of RM1.52. Our TP is derived from 19.0x PER of FY20F EPS of 8.0 sen. Due to the correction in share price of ~26% since our SELL recommendation in May, we think that the downside risk may be limited as most of the house-keeping has been done at the group. However, valuation remains considerably high now. Upside for the company includes better-than-expected synergies from the M&A and faster-thanexpected growth. Downside risks include slower-than-expected turnaround and expansion. Dividend yield is expected at 1.4%

Source: MIDF Research - 26 Sept 2019