2 August 2012

Outperform

Target price: RM3.91

DAIBOCHI remains an outperform and our top pick in the flexible packaging sector. We retain our valuation basis of 10.6 times calendar year 2013 PE (price-to-earnings) based on a 20% discount to our target market PE. Dividend yields are attractive at 6% to 7%. In addition, the proposed 1:2 bonus issue should help improve trading liquidity.

Yesterday’s briefing yielded a few surprises: Daibochi has made good progress in the non-food and beverage (F&B) sector, particularly medical gloves and tobacco; milk and coffee packaging for both the local and export markets is showing strong growth this year. Revenue from these sectors should rise 30% this year; Daibochi is making good progress in Australia as F&B multinational corporations (MNCs) there are seeking alternative suppliers.

The one downer is Daibochi’s failure to clinch orders from the Australian MNC it was negotiating with over the past few quarters. However, on the bright side, the company was invited to bid for orders from this MNC’s Asia-Pacific division. We understand that Daibochi has already been shortlisted and should know the outcome within the next few weeks. Management indicated that the orders could be �significant� if it is successful.

Daibochi’s efforts to diversify from the F&B sector over the past few years are finally paying off. The non-F&B segment contributed only 11% of group sales in first half of 2012 but this could rise to around 20% by end-2012 as new orders from tobacco and medical gloves kick in. In the second quarter, Daibochi secured one new major customer in the glove sector. The customer is believed to be one of the country’s major producers of medical gloves.

Remain invested in Daibochi. The group’s earnings are defensive and any major decline in its raw material prices should aid its margins in the second half. In addition, the company could make major headway in Australia. The stock’s dividend yields remain attractive at 6% to 7%.