Sunday, October 20

Analysts cautious on Daibochi’s prospects on subdued consumerism

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KUCHING: Analysts are generally cautious on Daibochi Plastic and Packaging Industry Bhd’s (Daibochi) propsects ahead with most believing the group’s domestic sales to continue being impacted by subdued Malaysian gross domestic product (GDP) growth expectations this year along with the rising cost of living and relatively high household debt.

According to RHB Research Institute Sdn Bhd (RHB Research), while Daibochi recently secured two new contracts for the food and beverage (F&B) and fast-moving consumer goods (FMCG) segments in the Australia and New Zealand markets that could add an estimated additional RM10 to RM12 million per annum to revenue, the research house expected domestic sales to remain vulnerable going forward on the back of subdued 2016 Malaysia GDP growth expectations.

Financial year 2015 (FY15) results made up 93 per cent of RHB Research’s/consensus estimates.

The research house noted that 4Q15 revenue dipped 3.4 per cent quarter on quarter (q-o-q) from lower export and domestic sales.

Going forward, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) expected further topline growth to stem from the company’s export sales and introduction of new products.

To this end, Daibochi has secured export contracts which are due to commence deliveries from the second quarter of FY16 (2QFY16) onwards.

“However, the group expects its domestic sales to continue to be impacted by the rising cost of living and relatively high household debt,” it said.

Meanwhile, RHB Research also expected Daibochi to face rising cost pressures, with the increment in the minimum wage to RM1,000 per month (from RM900) as of July 1, 2016 as well as uncertainties regarding the 100 per cent hike in the foreign worker levy.

The research house noted that this is further compounded by the Government’s recent announcement of the labour supply freeze that could negatively impact Daibochi, as labour constitutes an estimated 10-11 per cent of cost of goods sold (COGS).

RHB Research upgraded its FY16-17 earnings forecasts by five per cent, to account for the two new contracts secured, as well as introduce its FY18 forecast.

Risks to the research house’s recommendation included better-than-expected domestic sales growth, led by a recovery in the broader economy.

RHB Research expected earnings to remain vulnerable on the back of subdued 2016 Malaysian GDP growth expectations.

This, coupled with unattractive valuations – Daibochi was trading at a 42 per cent premium to the sector average – led RHB Research to maintain a ‘sell’ call.

The research house’s target price of RM1.65 per share was pegged to a 15-fold FY16F price-earnings (P/E), which was Daibochi’s five-year historical mean.

As for MIDF Research, the research arm maintained its ‘neutral’ stance with a revised FY16 target price of RM1.96 per share which reflected the recently completed share split and bonus issues.

The research arm’s valuation was premised on the dividend discount model, with a cost of equity of 9.27 per cent and terminal growth of 4.8 per cent.