4 October 2012

Daibochi Plastic and Packaging Industry Bhd

(Oct 3, RM2.49)

Maintain outperform with revised target price of RM2.90 from RM2.60: We maintain our ‘outperform’ call and earnings per share (EPS) forecasts for Daibochi but raise our target price as we roll it forward to end-2013, while applying a calendar year 2014 target price-earnings ratio (PER) of 10.6 times, still based on 20% discount to our target market PER.

Further M&A developments in the plastic industry could catalyse Daibochi, which is our top pick in the packaging sector.

In an industry that has not seen M&A for some time, a potential merger of Scientex Bhd (not rated) and GW Plastics Holdings Bhd (not rated) which were suspended from trading last Friday could stir interest in other listed plastic companies.

We believe Scientex could be looking to take over GW Plastics or buy its assets. Most of the listed players in the plastic industry are mainly small caps and a merger would lead to better economies of scale.
We think that Daibochi could benefit from M&A developments in the industry.

In the first half of 2012 (1HFY12), the non-food and beverage (F&B) sector contributed 12% of Daibochi’s revenue. However, with higher contribution from the medical glove and tobacco sectors, we estimate that non-F&B revenue contribution should rise to around 20% from 2013 onwards.

The company is also looking to expand its export business, which currently contributes 40% of revenue. The management is negotiating a few major orders from multinational corporations in Australia and Asia. If successful, this could provide a major boost to the company’s bottom line.

We estimate that raw material prices were on average 5% higher in the third quarter (3Q) of 2012 than in 2Q. The management is not too worried about the spike in raw material prices in September as a quarterly price review enabled it to pass on some of the cost rise to its customers.