DAIBOCI (8125) - Daibochi Plastic & Packaging - Profit margin recovery
Target RM4.75 (Stock Rating: Hold)
During its 4Q14 briefing, Daibochi indicated that it expects a much better year in view of declining raw material prices and expected higher export revenue. We maintain our EPS forecasts and our target price is unchanged at a 2016 P/E of 13x, on par with the sector. We maintain our Hold rating as the stock is not cheap following its 10% price rally the past month. We prefer Thong Guan for exposure to the packaging sector.
What Happened
Today’s 4Q14 results briefing offered a few positive surprises i) in 1Q15, the company started commercial production of a new product, sterilised film, which is expected to contribute around RM12m revenue annually. This was a positive surprise to us as there had not been any indication of this new product from management in the past. Product trial and testing only took six months before commercial production, ii) Raw material prices in Jan 2015 are down from 4Q14 levels; some of the raw materials that experienced sharp price falls include polypropylene films (average price down 13%) and polyethylene resins (average price down 9%), iii) its new high-speed sealing and anti-leak sealing films are getting positive feedback from test and trial results the past few months and iv) GST’s impact on Daibochi is mainly on cash flows. For raw material imports, the company has to pay the GST upfront, which raises its working capital needs by RM0.5m monthly.
What We Think
The worse is over for the company. If history is any indication, Daibochi generally benefits from profit margin expansion stemming from declining raw material prices. However, due to the weakening of the ringgit against the US$, the impact of the raw material price decline is less. Topline growth should remain positive for the company due to exports from both Australia and ASEAN markets and new products like the sterilisable film which should boost export revenue. So far, imminent GST implementation in April has not dampened domestic orders, an indication of the resilience of the F&B sector, which contributes more than 80% of group revenue.
What You Should Do
In view of lower raw material prices, Daibochi’s earnings should see a strong recovery in 2015. However, we believe most of the good news is already in its share price which is not cheap at 14x-15x FY15 P/E. While dividend yield looks attractive at above 5%, investors should switch to Thong Guan Industries.
Source: CIMB Daybreak - 12 February 2015
Target RM4.75 (Stock Rating: Hold)
During its 4Q14 briefing, Daibochi indicated that it expects a much better year in view of declining raw material prices and expected higher export revenue. We maintain our EPS forecasts and our target price is unchanged at a 2016 P/E of 13x, on par with the sector. We maintain our Hold rating as the stock is not cheap following its 10% price rally the past month. We prefer Thong Guan for exposure to the packaging sector.
What Happened
Today’s 4Q14 results briefing offered a few positive surprises i) in 1Q15, the company started commercial production of a new product, sterilised film, which is expected to contribute around RM12m revenue annually. This was a positive surprise to us as there had not been any indication of this new product from management in the past. Product trial and testing only took six months before commercial production, ii) Raw material prices in Jan 2015 are down from 4Q14 levels; some of the raw materials that experienced sharp price falls include polypropylene films (average price down 13%) and polyethylene resins (average price down 9%), iii) its new high-speed sealing and anti-leak sealing films are getting positive feedback from test and trial results the past few months and iv) GST’s impact on Daibochi is mainly on cash flows. For raw material imports, the company has to pay the GST upfront, which raises its working capital needs by RM0.5m monthly.
What We Think
The worse is over for the company. If history is any indication, Daibochi generally benefits from profit margin expansion stemming from declining raw material prices. However, due to the weakening of the ringgit against the US$, the impact of the raw material price decline is less. Topline growth should remain positive for the company due to exports from both Australia and ASEAN markets and new products like the sterilisable film which should boost export revenue. So far, imminent GST implementation in April has not dampened domestic orders, an indication of the resilience of the F&B sector, which contributes more than 80% of group revenue.
What You Should Do
In view of lower raw material prices, Daibochi’s earnings should see a strong recovery in 2015. However, we believe most of the good news is already in its share price which is not cheap at 14x-15x FY15 P/E. While dividend yield looks attractive at above 5%, investors should switch to Thong Guan Industries.
Source: CIMB Daybreak - 12 February 2015
