DAIBOCHI PLASTIC AND PACKAGING INDUSTRY BHD

By CIMB Investment Bank Research Rating: Reduce

Target Price: RM1.88

AS the stock valuation of Daibochi remains expensive, CIMB Research maintained its “reduce” call on the packaging company. However, the brokerage has increased its target price for Daibochi to RM1.88 from RM1.48 previously, as it rolls forward to valuation to financial year (FY) ending Dec 31, 2017.

CIMB Research said its new target price for Daibochi was still based on 15.6 times price-earnings ratio, which represented a 20% premium over the sector average in view of Daibochi’s Myanmar joint-venture’s (JV) attractive long-term growth prospects. The brokerage said it maintained its earnings forecasts for Daibochi unchanged.

CIMB Research said it remained long-term positive on Daibochi’s move to Myanmar, noting the company had the first-mover advantage in the country.

“Myanmar currently does not have many multinational companies (MNCs) but we believe it would only be a matter of time before more MNCs set up operations in Myanmar. Daibochi has been working with major MNCs in the region and as such, we believe the Daibochi JV has a strong chance of getting the MNC business in Myanmar,” CIMB Research said.

Daibochi’s 60%-owned Myanmar JV started operations in Q3’FY17 and the JV recorded RM6.5mil revenue and RM1.95mil pre-tax profit, accounting for 19% of the group’s total pre-tax profit, during the quarter.

Notably, Daibochi’s Myanmar pre-tax profit margin was 29%, compared to only 9% for its Malaysia operations. The higher margin allowed the company to do the lower-margin business in Malaysia, which Daibochi did not want to do in the past.

The company revised its dividend policy to exclude Myanmar JV earnings – it will now pay at least 60% of its net profit excluding Myanmar JV operations.

CIMB Research pointed out that Daibochi’s nine-month net profit, which represented 64% of the total estimate for FY17, remained in line with consensus and the brokerage’s expectations.