We remain negative on Daibochi’s prospects as 4Q15 earnings pointed to weaker fundamentals. In particular, we expect domestic sales (MNC & non-MNC) vulnerability to persist on the back of subdued Malaysian GDP growth expectations this year. Also, valuations are unappealing as Daibochi is trading at a 42% premium to the sector average. Maintain SELL, with a revised MYR1.65 TP (from MYR1.58, 26% downside), pegged to an unchanged 15x P/E.

Cautious prospects ahead. While Daibochi recently secured two new contracts for the food and beverage (F&B) and fast-moving consumer goods (FMCG) segments in the Australia and New Zealand markets that could add an estimated additional MYR10-12m pa to revenue, we expect domestic sales to remain vulnerable going forward on the back of subdued 2016 Malaysia GDP growth expectations. FY15 results made up 93% of our/consensus estimates. 4Q15 revenue dipped 3.4% QoQ from lower export and domestic sales. Mounting cost pressures. We expect Daibochi to face rising cost pressures, with the increment in the minimum wage to MYR1,000/month (from MYR900) as of 1 Jul 2016 as well as uncertainties regarding the 100% hike in the foreign worker levy. This is further compounded by the Government’s recent announcement of the labour supply freeze that could negatively impact Daibochi, as labour constitutes an estimated 10-11% of COGS. Earnings and risks. We upgrade our FY16-17 earnings forecasts by 5%, to account for the two new contracts secured, as well as introduce our FY18 forecast. Risks to our recommendation include better-than-expected domestic sales growth, led by a recovery in the broader economy.

Maintain SELL. We expect earnings to remain vulnerable on the back of subdued 2016 Malaysian GDP growth expectations. This, coupled with unattractive valuations – Daibochi is trading at a 42% premium to the sector average (Figure 3) – leads us to maintain a SELL call. Our TP of MYR1.65 is pegged to a 15x FY16F P/E, which is its 5-year historical mean.

Financial Exhibits

SWOT Analysis

Source: RHB Research - 23 Feb 2016