05 May 2016

KUALA LUMPUR: CIMB Equities Research is retaining its Reduce call on Daibochi Plastic and Packaging which is Malaysia’s largest flexible plastic packaging player.

It said Thursday that Daibochi remains a Reduce as the stock’s valuation is still expensive at FY17 price-to-earnings of 15.4 times. Its last traded price was RM2.07 while the target price was RM1.76.

“We maintain our EPS forecasts and target price, based on an unchanged sector target FY17 P/E of 13 times. Possible de-rating catalysts are continued weak domestic demand and expensive stock valuations. We advise investors to switch to Thong Guan, our top pick in the sector,” it said.

CIMB Research said while 1Q16 revenue was up 4% on-year, net profit growth rose by a stronger 6.6%, mainly due to lower effective group tax rate.

“1Q16 effective tax rate was 19.8% compared to 24.7% in 1Q15. The lower tax rate was mainly due to reinvestment tax allowances applicable in 2016-2018. Daibochi declared a first interim DPS of 1.45 sen, equivalent to 61% net dividend payout ratio,” it said.

The research house said that in 2015, it estimated that group export sales increased by around 10%. This year, it continues to expect topline growth to be led by exports, especially to markets like Asean and New Zealand.

New Zealand sales delivered the highest growth in 2015, up 138% to RM3.1mil. In 2Q16, the company started supplying 4-side seal bags to the New Zealand fast-moving consumer goods (FMCG) market.

Since the start of the year, domestic sales have shown signs of recovery. 1Q16 domestic sales was up 12% compared to the last three quarters post GST -implementation in April 2015, which is a positive sign.

“We forecast conservative domestic sales growth of 5%-6% in 2016. We understand that the company plans for RM20mil capex in 2016. The capex is meant for the setting up of a new blown film machine, which is slated to start commercial production in 2H16.

“In addition, the company is looking to expand the factory in Jasin, Melaka by 80% to 140,000 sq ft. Daibochi would benefit from the special reinvestment allowance incentive, available from 2016-2018,” it said.