In  view  of  Daibochi’s  mediocre  9M14  thus  far,  we  trim  our  earnings forecasts  for  FY14.  However,  we  believe  2015  may  be  a  record  year, with earnings fuelled by its topline growth as well as margin expansion on  the  back  of  lower  raw  material  prices.  Despite  this,  valuations  are not compelling at this juncture. Maintain NEUTRAL and  a  MYR4.10 TP(2.6% downside), premised on an unchanged 13x P/E 2015 EPS.

Double-digit  topline  growth  not  an  issue.  During  Daibochi’s  analyst briefing yesterday, management was upbeat on its  sales target moving forward.  We  understand  from  management  that  one  of  its  key  multinational corporation (MNC)  customers has renewed its contract with the company this month. Daibochi also received a few tender requests in the Asean region as well as Australia. 

Lower raw material prices on the back of declining crude oil prices. We understand that prices for polyethylene (PE) and polypropylene (PP) in  October  dropped  3%  MoM.  Moving  forward,  we  expect  prices  to decline further in tandem with the decline in crude oil prices. As > 50% of its  raw  materials  comprise  of  PE  and  PP,  the  decline  in  PE  and  PP prices could  fuel  its  EBIT  margin expansion  moving forward  to  11%  in FY15 from 9.7% as of 9M14. 

b In  view  of  the  higher  operating  costs  and  forex  loss incurred in 3Q14 due to the depreciation  of AUD/MYR, we trim our FY14earnings  forecasts  by  13.9%.  However,  we  make  no  changes  to  our FY15 and  FY16 projections.  We believe 2015 may  be a record year for Daibochi,  with  earnings  driven  by  sales  growth  as  well  as  margin expansion on the back of lower raw material prices. Our projections take into consideration its limited pricing power in  sales. 

Maintain  NEUTRAL.  As  we  make  no  changes  to  our  FY15  earnings forecasts, we maintain our TP at MYR4.10, based on a target P/E of 13x on  FY15 EPS, in line with its 3-year historical average. We reiterate our view that 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  the  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).

Source: RHB