KEY INVESTMENT HIGHLIGHTS

• 1QFY20 results surprised on the upside

• Record topline and net profit at RM11.3m

• Better operational efficiency lifted bottomline

• Earnings for FY20E/FY21F revised by +71.1%/+53.7% respectively to RM45.0m/RM45.8m

• Upgrade to BUY with a revised TP of RM2.60

1QFY20 results surprised on the upside as net profit of RM11.0m made up 43% of ours and 35% of consensus’ full year estimates. Net profit exceeded expectations mainly due to better sales of product mix as well as improved operational efficiency which lifted overall profitability. No dividends were announced during the quarter.

Record topline and net profit at RM11.0m. The revenue of RM152.6m can be attributed to the inclusion of Mega Printing and Packaging (MPP) and higher demand from its customers. Compared to the previous quarter, which already chalked record revenue for the group, sales climbed by 23.8% mainly because of the consolidation of sales from MPP that started in August. Meanwhile, net profit surged to RM11.0m from a loss of RM0.3m in the previous three-month period. The increase can be attributed to higher sales post-merger with MPP, elevated operational efficiency and an improvement in product mix.

Better operational efficiency impacts bottomline positively. Among others, cost controls, shared raw material procurements and services yielded positive results. Daibochi’s Jasin plant is now operated by Scientex Great Wall to streamline operations and optimise resource utilisation. Topping that, the improved process flows and optimised space utilisation has also resulted in less wastage. All these measures have enabled Daibochi to improve its pre-tax profit margin from a range of 2% to 8% since 2018 to close to 10% in the latest quarter. Moving forward, the company targets to complete the implementation of Daibochi’s enhanced production system to MPP’s operations by April 2020. Daibochi will continue to focus on complex packaging while MPP will focus on simple packaging structures. Leveraging on the shared knowledge of the bigger entity, the company will continue to develop more mono-material laminate products to meet the increasing demand for sustainable packaging solutions. To-date, it has start production of its first mono-material laminated packaging for one of its local beverage customers.

Earnings for FY20E/FY21F revised by +71.1%/+53.7% respectively to RM45.0m/RM45.8m as the synergy of the enlarged group occurs sooner than expected. Daibochi’s encouraging 1QFY20 could mark the new norm for the company’s performance in the next few quarters. We believe that much of the provisions and impairments had been completed in the past few quarters, leaving the company in a relatively clean slate. Meanwhile, there may be more benefits to be reaped from the integration of the companies. Opportunities may also arise from higher orders or new projects from existing and new customers given its bigger size and wider range of product offering. We also do not rule out more merger and acquisitions in the future.

Upgrade to BUY from NEUTRAL with a revised TP of RM2.60 (previously RM1.52). Our TP is derived from 19.0x PER of FY20F EPS of 26.3 sen following the revision in our earnings assumption. Our valuation of 19.0x PER is unchanged and is based on Daibochi’s long-term average PER. We upgrade our recommendation to BUY from NEUTRAL previously to the better than expected synergy between Scientex, Daibochi and MPP, which have lifted overall profitability. We believe that further upside may come from the full integration of MPP into the group as the acquisition of MPP has only been completed since August. Downside risks include slower than expected expansion, spike in raw material prices and setbacks from integration of the companies. Dividend yield is expected at 2.4%.

Source: MIDF Research - 3 Dec 2019