15 November 2016

By Ganeshwaran Kana

PETALING JAYA: Daibochi Plastic & Packaging’s (Daibochi) US$6.8mil (RM29.2mil) acquisition of a 60% stake in Daibochi Packaging (Myanmar) Co. Ltd. (DPM), has been optimistically received by analysts.

CIMB Research said on Tuesday that the deal will be able to boost the group’s net profit once it is approved by the authorities, although the group’s net gearing is projected to rise to 0.38 times from 0.22 times hitherto.

DPM is a joint-venture (JV) company in which Myanmar’s Smart Pack Industrial Company Ltd (MSP) will inject its assets of plant and equipment into DPM and receive a 40% share of the JV and US$6.8mil in cash (RM29.2mil).

CIMB Research has highlighted that the JV announcement is a positive surprise as it should help Daibochi expand its business in the ASEAN region and position the company to potentially become one of the largest flexible packaging companies in Myanmar, and also in the region.

“In addition, the JV should help boost the group’s pretax profit margin beyond the current 8%.

“While Daibochi’s net debt is set to rise from RM41mil to RM70.2mil, we think this should not be a concern due its strong operational cash flow outlook, ” said CIMB Research in its report.

The research house noted that Daibochi’s forecast earnings per share for the financial years of 2017 and 2018 (FY17-18) could rise by 18-22%.

CIMB Research has maintained its “reduce” call on Daibochi’s shares, pending approval for its Myanmar’s JV. Target price is also maintained at RM1.93.

Meanwhile, MIDF Research is also positive on the collaboration as Daibochi’s 60% stake in DPM can contribute around 10% to its FY17 profit before tax estimates, assuming that the deal is completed by the first half of the year. From FY18 onwards, Myanmar could contribute 18- 20% to the group’s profit before tax.

The research house said that since 70% of Daibochi’s export sales come from South East Asia, the addition of Myanmar could boost export sales as the flexible packaging market size in Myanmar is estimated to grow 22% for the next five years.

“The acquisition is also justifiable by the lower operating costs in Myanmar, notably due to the lower costs of labour.

“While the net gearing could increase to 0.39 times, we think that is still manageable as DPM will be able to fund its future capital expenditure from a bigger internally generating fund,” said MIDF Research in its report.

The contribution from the Myanmar operations could add 2.81sen to the research house’s FY17 earnings per share and 0.79sen to its distribution per share assumption.

MIDF Research is also maintaining its “neutral” recommendation with an unchanged target price of RM2.14.