12 February 2015

KUALA LUMPUR: CIMB Equities Research said Daibochi Plastic and Packaging’s FY14 net profit was largely in line with the market and its expectations, coming in at 98% of forecast.

“2015 should be a better year in view of the lower raw material prices and higher export topline growth. We maintain our EPS forecasts and add new FY17 numbers.

“Our target price is unchanged at a 2016 price-to-earnings of 13 times, on par with the sector. However, we downgrade our rating from an Add to a Hold as the stock is not cheap following the 10% price rally the past month. We prefer Thong Guan for exposure to the packaging sector,” it said on Thursday.

On Wednesday, Daibochi reported its FY14 revenue was up 11% on-year but net profit was down 13.5%.

The lower net profit was mainly due to higher raw material prices (up till 3Q14) and the electricity rate hike starting January 2014. Interim dividend per share was 3.5 sen. YTD, 13 sen DPS has been declared, equivalent to a 62% net dividend payout ratio.

CIMB Research pointed out crude oil’s sharp price decline over the past few months has been positive for the company.

Raw materials make up more than 60% of its production costs and the price of its main raw materials, like polyethylene and polyester resins (derivatives of crude oil), have been falling over the past few months.

“Daibochi generally benefits from profit margin expansion during periods of declining raw material prices. We have assumed lower raw material prices in our earnings forecasts.

“Around 50% of group revenue is derived from the domestic market, and more than 80% of its sales are from the F&B sector. We believe domestic consumers have been cautious during the past year ahead of the implementation of GST in April 2015.

“This is not unexpected, but given the lower crude oil prices, we believe consumer sentiment is improving and domestic spending should recover from 2H15 onwards.

“Topline growth in 2015 is expected to come mainly from the export markets, primarily Australia and Asean, where the company is currently negotiating a few major contracts.

“Daibochi started commercial production for a major F&B customer (based in Thailand) in 3Q13 and we expect the company to secure more orders from this customer soon,” it said.