Daibochi’s  9M14  earnings  of  MYR17.8m  were  below  expectations. Despite  a  13.2%  YoY  surge  in  9M14  sales,  earnings  declined  13.1%, largely  due  to  higher  raw  material  prices  since  2H13.  We  retain  our forecasts pending an analyst briefing today. Daibochi’s valuations arenot  compelling  at  this  juncture.  Maintain  NEUTRAL  and  MYR4.10  TP, pegged to an unchanged 13x P/E 2015 EPS (a 3.5% downside).

Below  expectations.  Daibochi’s  9M14  earnings  of  MYR17.8m  were below  expectations,  making  up  62%/60%  of  our/consensus  full-year estimates  respectively.  Despite  a  13.2%  YoY  sales  growth,  earnings declined 13.1% YoY, largely due to: i) higher raw material prices since 2H13,  ii) electricity  tariff  hike in  early  2014,  and  iii)  higher wages.  The group announced a  2.5 sen  DPS, bringing 9M14  distribution to  9.5 sen vs 11 sen for 9M13. 

Margin  squeeze continues  in 3Q14.  Despite  only  a 4.5% QoQ decline in 3Q14 sales,  PBT declined by a larger quantum of 20.1% QoQ  due to: i)  MYR0.1m  loss  in  forex  vs  MYR0.5m  gain  in  forex  in  2Q14,  and ii)  significant  reduction  in  big  run  jobs   resulting  in  lower  production efficiency. On the other hand,  there  was no significant  differential in raw material prices vs the preceding quarter. 

A  better  4Q14  ahead.  We  expect  a  stronger  4Q14  ahead  driven  by: i)  new  orders  from  clients  in  ASEAN,  ii)  buoyant  consumer  demand ahead  of  year-end  festivities,  and  iii)  lower  raw  material  prices  on  the back of the decline in crude oil prices. We make no changes to the profit and  loss,  balance  sheet  as  well  as  cash  flow  components  at  this juncture, pending today’s analyst brie fing. We also take the opportunity to introduce our FY16 projections. 

Investment case. We leave our TP unchanged at MYR4.10, based on a target P/E of 13x to FY15 EPS, in line with its 3 -year historical averagevaluation.  Daibochi’s valuations are  not compelling  at this juncture,  with the  stock  already  trading  at  a  15-40%  premium  to  its  peers.  For exposure  to  consumer  packaging  sector,  we  prefer  SKP  Resources (SKP MK, BUY,  TP:  MYR0.85), Scientex (SCI MK, BUY,  TP:  MYR8.64) and Thong Guan (TGI MK, BUY, TP: MYR2.60). Maintain NEUTRAL.

Source: RHB