A Cheaper Proxy to The F&B Sector
Background: Daibochi Plastic & Packaging Industries Bhd (DPP) provides packaging solutions for food, beverage, pharmaceutical and industrial applications, catering to both the domestic and export markets. It is a leading manufacturer and converter of flexible packaging in ASEAN, with a built-up factory area of 325,000 sf on 14 acres of land. DPP has developed vertically integrated facilities that provides full lab testing, Roto-Gravure Printing, Dry & Extrusion Lamination, In-house CPP and Blown Films with Co-Extrusion, In-house Metalizing and Inhouse Cylinder Making.

Why are we highlighting this stock? Consensus estimates a record net profit of MYR23.6m in FY12, exceeding the previous high of MYR22.8m in 2009. Earnings may surprise on the upside in FY13 as it broadens its clientele in the F&B and non-food sectors. The global flexible packaging market was worth USD58b in 2011, and is expected to reach USD71b in 2016. Asia, with 29% of global volume, is the largest and fastest growing flexible packaging market with forecast 5-year CAGR of 7.9% from 2011-16. Consensus PERs of 11.3x for FY12 and 9.8x for FY13 are undemanding as DPP offers a cheaper proxy to the F&B sector currently trading at 22x FY12 PER. We think that DPP, given its small market cap, should trade at 11x FY13 PER implying a MYR3.90 target (+12% upside).

2Q12 showed substantial improvement. Net profit rose 28% YoY in 2Q12 due to a more favourable sales mix and higher operational yields from the improvement in wastage control and cost efficiencies. Lower raw material prices (especially solvents) in 2Q12 vs 2Q11 also boosted profits as EBITDA margins widened to 14.7% from 11.6%. The strong 2Q12 lifted 1H12 net profit to MYR11.5m (+19% YoY). Pretax profit contribution from its core Packaging operations jumped 51% YoY to MYR15.6m in 1H12 as the group phased out its property development activities.

Game-changer Down Under? Exports to Australia currently account for 15% of total revenue through customers such as Purina and Fonterra. The recent merger of Amcor and Aperio (two of the largest packaging players in Australia) is an opportunity for DPP as local MNCs seek alternative flexible packaging suppliers. DPP hopes to make a breakthrough to supply ultra high barrier films for the F&B and FMCG sectors within the next few quarters given its relative cost advantage.

Upgrading facilities. DPP continues to increase capacity and upgrade its facilities for new and existing clientele. It plans to increase its non-food packaging revenue from 12% currently to 20% by year-end for new sectors such as medical gloves, electrostatic discharge (ESD) and cigarette packaging.

Higher dividend payout. DPP has raised its dividend payout ratio from 50% to 60% given its strong cash flow position and improved prospects for the flexible packaging industry. It currently has a low gearing ratio of 0.13x with net debt of MYR18.9m.

Source: Maybank Research - 13 August 2012