KEY INVESTMENT HIGHLIGHTS

• Commendable FY20 performance amidst dismal economic conditions brought on by the pandemic

• Higher production volumes targeted by the group with total allocated capex of RM100m

• Integrated operations with Scientex allow Daibochi to target for growth in customer coverage across Southeast Asia and Oceania

• Maintain BUY with slightly adjusted TP of RM2.98

Commendable FY20 performance amidst dismal economic conditions brought on by the pandemic. We attended Daibochi’s 4QFY20 analyst briefing last Friday and came away feeling positive on the company’s future trajectory. Recall that Daibochi recorded 4QFY20 PATAMI of RM11.2m, on the back of RM155.8m in revenue. In addition, the group’s FY20 PBT was at RM63.3m, with a PBT margin of 10.2% as compared to 3.6% during 19M FY19. We gather that the increase in margin was largely on the back of improved efficiency post-integration with Scientex. This in turn led Daibochi to deliver a record-high net profit of RM47.7m during FY20.

Higher production volumes targeted by the group with total allocated capex of RM100m. Recall that the group had announced earlier to allocate an additional RM40m to purchase eight more lines. With these purchases, the total RM100m worth of capex will cumulatively bring in a total of five printing, eight lamination as well as eight bagging machines for the group, with 14 of them expected to be commissioned within FY21. On another note, we gather that Daibochi have reviewed over 100 product developments that were conducted in house during FY20. To note, roughly 25% of these product developments were for sustainable structures, and within those 25%, an approximate of 30% of it have been commercialized. Taking all these into consideration, we would anticipate more innovations to be rolled out for wider range of packaging formats, supporting the group to continue to cater to the demands of their existing customers as well as having the ability to further expand their market reach in the long run.

Integrated operations with Scientex allow Daibochi to target for growth in customer coverage across Southeast Asia and Oceania. Post-acquisition by Scientex, we gather that the group is benefiting through enhanced operational efficiencies via ongoing capacity expansions, reduced wastage (current wastage level at a range of 14%-15% as compared to pre-integration of above 20%) as well as improved inventory controls. By leveraging on Scientex’s upstream film production capabilities, we expect Daibochi to be able to (1) focus more on its converting business allowing them to serve their customers better, as well as (2) having the ability to offer more advanced and customized solutions through its joint R&D with Scientex. Having said that, we posit this integration to continue to assist the group in pursuing for more growth opportunities across Southeast Asia and Oceania, premised on the strong demand for flexible plastic packaging within the expanding food & beverage, and fast-moving consumer goods industry.

Maintain BUY with a slightly adjusted TP of RM2.98. We make no changes to our earnings forecasts. We derive our TP by pegging its FY21 EPS of 15.4sen to PER of 19.4x (previously 19.0x) which equates +1.0SD to the group’s one year historical average. Estimated dividend yield is +1.5%.

Source: MIDF Research - 21 Sept 2020