Daibochi’s  1QFY14  results  came  in  below  ours  and  consensus expectations. Despite its subdued 1Q, we still expect 2014 earnings to perk up in 2H with expectations of increased orders from its current and potential new  MNC F&B customers and  its  newly constructed plant to be fully operational by 2QFY14 to further boost earnings. Downgrade to TAKE PROFIT (from NEUTRAL) with unchanged FV of MYR3.53.

• Below  expectations.  Daibochi’s  1QFY14  numbers  came  in  below  our and consensus expectations representing only 20%/19% of the full-year estimates respectively. Despite a 23.2% y-o-y sales growth due to higher demand from new clientele particularly in South East Asia and Australia, the company’s 1QFY14 earnings dipped 7.1% y-o-y to MYR6.6m. This was  mostly  attributed  to:  i)  higher  raw  material  prices,  especially polyethylene  and  polypropylene  resins  and  films,  ii)  higher  operating expenses from the electricity tariff hike, and iii) lower property earnings.
• Outlook.  Notwithstanding  its  subdued  1QFY14  results,  we  are  still expecting 2014 earnings to perk up in the 2H as we expect: i) increased orders from its existing and potential new MNC F&B clients, ii) its newly constructed Daibochi Films Complex is expected to be fully operational from 2Q14, and iii) demand for its new two -layer (duplex) films continues to gain foothold among customers.
• Forecasts  and  risks.  We  leave  our  forecasts  unchanged  ahead  of today’s analyst briefing. Key investment risks are: i) a sharp increase in raw  material prices, ii) losing contracts from key customers (ie Nestle), and iii) plant accidents/shutdowns.
• Downgrade  to  TAKE  PROFIT.  We  downgrade  the  stock  to  a  TAKE PROFIT  (from  NEUTRAL)  and  we  advise  investors  to  accumulate  at lower  levels  in  the  future.  Daibochi  is  currently  trading  at  +2SD  of  its historical  mean.  Our  MYR3.53  FV  is  based  on  a  12x  FY14  EPS.  We deem this reasonable as we believe that all positives have been priced in, backed by: i) Daibochi’s solid long-term fundamentals, ii) an expected increase  in  production  capacity  starting  2QFY14,  iii)  the  probability  of securing  new  MNC  clients,  and  iv)  prospects  of  adding  more machineries.

Source: RHB