Daibochi’s  FY14  earnings  of  MYR23.7m  (-13.5%  YoY)  were  within  our and consensus’  expectations. Maintain NEUTRAL and a TP of MYR4.10 (11.4%  downside)  for  now,  pending  an analyst  briefing  today.  Despite an  11%  growth  in  FY14  sales  from  an  increase  in  exports  to  MNC customers from the  F&B  sector,  earnings  declined by  13.5%  due to  a hike in raw material prices, electricity tariffs as well as wages.

Within expectations. Daibochi’s FY14 earnings of MYR23.7m (-13.5% YoY)  were  broadly  within  our and consensus’  expectations, making  up 96% of  earnings forecasts.  Although FY14 sales grew 11%  YoY due to an  increase  in  exports  to  multinational  corporation  (MNC)  customers from the food & beverage (F&B) sector, PBT declined 14.6% YoY due to:i) higher raw material prices since 2H13 and throughout 2014, ii) hike in electricity tariff in Jan 2014, and iii) a larger wage bill. Sequentially, 4Q14earnings were up 17.8%, largely due to a spike in associate contribution and lower effective tax rate  of 17.3% (3Q14: 24.8%).  An interim DPS of 3.5 sen was declared during the quarter under review, bringing its FY14 distribution to 13 sen (FY13: 15 sen).

Outlook. We expect 2015 to be a better year for Daibochi, driven by: i) the continued growth in its  exports sales from  its  MNC clientele, and ii) improved EBIT margins from  lower raw material prices on the back of the sharp  decline  in  crude  oil  prices.  We  are,  however,  mindful  that  the benefit of lower raw material prices  will not benefit Daibochi  fully  due to cost pass through via a price review trigger mechanism in place for itsmajor customers.  In addition, we understand from management that the impact  of  the  stronger  USD  will  be  minimal  due  to  a  natural  currency hedge from its import and export activities.

Earnings  forecasts.  We  make  no  changes  to  our  earnings  forecasts pending  an  analyst  briefing  today  and  also  take  this  opportunity  to introduce our FY17 projections.

Recommendation and TP  under review.  We maintain  our NEUTRAL recommendation  and TP of  MYR4.10  for now, based on a target P/E of 13x  to  FY15  EPS.  Daibochi’s  valuations  are  not  compelling  at  this juncture, as the stock is currently trading at 15.1x FY15F P/E, a premium of 15-40% to its peers.  

Source: RHB