Daibochi’s 1Q15 net profit of MYR6.2m was below expectations, declining 6.3% YoY due to: i) a 4.7% YoY decline in sales, and ii) a lower EBIT margin of 9% (1Q14: 10.3%) on the back of higher depreciation and labour costs. We trim our earnings forecasts but maintain our TP of MYR3.80 (12% downside) and SELL recommendation. An interim DPS of 3.5 sen was declared.

Earnings miss expectations. Daibochi’s 1Q15 earnings of MYR6.2m were below our and consensus expectations, reaching just 20% of estimates. 1Q15 sales declined 4.7% YoY due to slower demand from export markets. In addition, new export orders for two new product lines slated for delivery in 1Q15 have been delayed to 2Q15 and 3Q15 respectively. An interim DPS of 3.5 sen was declared (1Q14: 3.5 sen).

1Q15 EBIT margin below par. Although there were significant declines in raw material prices during 1Q15 (vs 1Q14) on the back of the collapse in crude oil prices, its 1Q15 EBIT margin contracted to 9% (1Q14: 10.3%), which we believe was due to its limited pricing power on its products – as about 80% of total sales are subject to a cost pass-through. In addition, the benefit of the decline in imported raw material prices has been offset by a weaker MYR. We also note that the quarter under review saw higher depreciation and labour costs as well vs 1Q14.

Forecasts and risks. After updating our assumptions, we cut our FY15-17 earnings forecasts by 6.6-8.4%. Key risks to our earnings include: i) a sharp increase in raw material prices, ii) loss of contracts from key customers, and iii) plant accidents/shutdowns.

Maintain SELL and a TP of MYR3.80. Following our earnings revision and rolling over our base year to FY16 from FY15, we maintain our SELL recommendation and TP of MYR3.80, based on a 14x P/E, broadly in line with its 3-year average P/E of 15.4x. Daibochi currently trades at a rich forward valuation of 15.7x FY16 EPS, with a dividend yield of 3.8% that is not especially compelling. Investors should consider switching to SKP Resources (SKP MK, BUY, TP: MYR1.18) and Scientex (SCI MK, BUY, TP: MYR8.20).

Financial Exhibits

SWOT Analysis

Company Profile

Daibochi manufactures a wide range of sophisticated, multi-layer packaging materials, mainly to cater the high-end markets as well as various local MNC players in the consumer food & beverage sector.

Recommendation Chart

Source: RHB Research - 8 May 2015