Current Price RM2.33 (as at 8th January 2010)
New Target Price RM2.96
Acquisition of new key account to spur growth
Daibochi’s investment proposition is at first glance,
driven by a surge in margins at the plastic packaging
materials segment, which buoyed group results up
218%YoY in 3Q-09. The steady share price gain is
also on promising prospects for a sustained 8%
medium term dividend 5.2% yield that puts the stock in
the running to be added as a medium-term holding.
But more encouraging is the recent acquisition of the
BAT (British American Tobacco) account that may pan
out to be a key regional supply contract in the longer
term. BAT is looking to source domestically to
substitute for more expensive imported metallized
polyester and aluminum foil and the initial orders are
aimed at qualifying Daibochi as a long term regional
supplier for the bulk of its needs. As the share price
continues to notch up 52-week highs, investors may
finally recognize its potential as a growth stock. We
have placed our initial price target at RM2.96, with a
BUY recommendation.
A Quick Take on 3Q09 Results
3Q-08 quarter is a seasonally weak quarter. Revenues
fell just 0.6%YoY but were down 7.0% QoQ on
seasonally lower sales volume after the ramp-up ahead
the Eidul-Fitr season. 3Q’s low 16.3% effective tax rate
also helped. Sales were flat as this is a function of the
lower cost of plastics being passed on to customers.
But the lag and incomplete passing on of cost savings
benefits margins. Consequently, 3Q-09 gross margins
at 13.2% is at a record high. Our forecast is for FY09
as a whole, revenue growth will continue at 5.9%,
driven by a marginal 4% volume gain and gains on
better mix of packaging materials. The price of
PE/PP/polyester resin and film fell sharply in 2008.
Film and resin of these 3 raw materials make up 65%
of material cost by value.
Recommendation
Our forecast is for FY2010 earnings to rise to
RM23.5m, representing +16.5% growth. This does not
include any assumption of a significant margin gain in
the event BAT ramps up orders. Even so, valuation
remains undemanding at 7.5X forward PER. The
company’s financial strength has strenthene4d sharply
in the past year and may swing into a net cash position
by this year. The rapid paring down of debts despite
payment of a bumper 15 sen dividend in 2009 is a
testimony of this trend. The strong growth prospect is
backed by a trend towards flexible packaging materials
rapidly replacing metal and rigid plastic containers for
an array of consumer goods. The share price has risen
372% in the YTD period, but the promised yield is still
at least 5.2%, or above our recommended threshold
yield for income stocks, giving the stock an anticipated
12-month total return of 33%. BUY
(By JUPITER SECURITIES RESEARCH)
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