PP 7767/09/2010(025354)

12 May 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

B r ief ing Not e

12 May 2010
MARKET DATELINE

Daibochi Share Price

Fair Value
:
:
RM3.14
RM4.20
Earnings Contribution From New Contracts To Come Recom : Outperform
(Maintained)
Onstream In 2H10

Table 1 : Investment Statistics (Daibochi; Code: 8125) Bloomberg: DPP MK

FYE Dec Turnover Net EPS Chg PER C.EPS* P/BV Net ROE Gross Div
Profit gearing
(RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) Yld. (%)
2009a 221.8 22.8 30.0 179.1 10.5 - 4.0 0.1 18.5 6.2
2010f 250.2 26.6 35.1 16.9 9.0 36.0 3.3 0.0 19.5 7.2
2011f 270.1 28.8 38.0 8.3 8.3 39.0 2.8 net cash 19.2 8.0
2012f 281.7 31.0 40.8 7.4 7.7 43.0 2.4 net cash 18.8 8.4
Main Board Listing / Trustee Stock * Consensus Based On IBES Estimates

♦ Rising raw material costs to be offset by pricing adjustment.

Daibochi was affected by higher raw material costs, which arose from higher Issued Capital (m shares) 75.9
demand vs. supply in the market (about 4-5%). However, to offset the Market Cap(RMm) 238.33
price increase, the company has since increased the average selling prices Daily Trading Vol (m shs) 0.2
of its products by c.4% w.e.f. Apr 10. 52wk Price Range (RM) 0.66-3.87
Major Shareholders: (%)
♦ Shorter credit period to minimise forex exposure. Daibochi recognises
Low Chan Tian 11.6
sale to its Australian subsidiary based on the spot exchange rates at the
Datuk Wong Soon Lim 6.5
time, which could change during the collection period. To minimise the
impact on unfavourable exchange rate on its AU$ exposure, it will be FYE Dec FY10 FY11 FY12
reducing the credit period granted to its subsidiary company. As to a longer EPS chg (%) -4.5 -5.0 -4.8
term solution, new terms and conditions will be worked out, to minimise its Var to Cons (%) -2.6 -2.7 -5.2
forex exposure to AU$.
PE Band Chart
♦ Expansion plans. Daibochi will be expanding its current factory to
accommodate for its new non-F&B ventures with capex guidance of RM10m
in FY10. Timeline of this expansion plans has yet to be determined. PER = 11x
PER = 8x

♦ New F&B projects bearing fruit. Daibochi has recently locked-in

PER = 5x

contracts with two major MNCs in Australia, for the production of “slider
bags” for pet food and flexible packaging for dairy products, which will be
taking effect in Jun 10. We estimate this to contribute about 2-3% of
revenue and 4-5% of our current net profit estimate in FY10. We are
positive on this development as we believe that the tie-up with these MNCs Relative Performance To FBM KLCI
(one being a new client) could lead to more future contracts.

♦ Visibility for non-F&B ventures becoming clearer. Daibochi will be Daibochi

obtaining the necessary certifications by end-May earliest, for its electronics
packaging. More meaningful developments from the healthcare sector would
be visible in the next quarter. We have yet to input any earnings
FBM KLCI
contribution from the non-F&B segment.

♦ Risks. The risks include: 1) sharp spike in raw material prices; 2) product
contamination; 3) loss of contracts from major customers; 4) shutdown /
plant accidents; and 5) heavy reliance on one / more customers.

♦ Forecasts. We have reduced our earnings forecasts by 4-5% in FY10-12

after: 1) reducing our capex assumption for FY10; and 2) increasing our
administrative expenses to be in line with FY09 numbers.

♦ Investment case. We still like Daibochi as we believe that the company

creates new markets for themselves in both the F&B and non-F&B sectors,
which generate higher margins. Following our changes in earnings
forecasts, our target price is reduced to RM4.20 (from RM4.40) based on
Hoe Lee Leng
unchanged 12x FY12/10 EPS. Based on guided net payout of 50%, this
(603) 92802239
translates to attractive gross dividend yields of approximately 7-8% p.a.,
hoe.lee.leng@rhb.com.my
paid quarterly. Maintain our Outperform recommendation on the stock.

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 12 May 2010

♦ Rising raw material costs to be offset by pricing adjustment. In Mar 10, Daibochi was affected by higher
raw material costs i.e. polypropylene and polyethylene, which arose from higher demand vs. supply in the
market as well as higher oil prices (raw material costs increased by 4-5% yoy). We understand that this one-
month price increase has negatively impacted the company’s profit before tax by about RM0.6m in 1QFY12/10.
Assuming raw material prices remain the same for the rest of the year, we estimate this would impact our
projected FY10 net profit by 6-7%. However, to offset the price increase, the company has increased the
average selling prices of its products by c.4% w.e.f. Apr 10. In our earnings forecast, we have estimated an
increase in raw material prices by 14-15% yoy and price increase of about 6-8% in FY10.

♦ Shorter credit period to minimise forex exposure. Daibochi has a natural hedge on its US$ exposure as its
US$ payments and collections are largely matched. This is not the case, however, for its AU$ exposure, which
led to an unrealised forex loss of RM0.4m in 1Q10. We estimate AU$ makes up 20-30% of Daibochi’s revenue
base currently. Management explained that the company recognises sale to its Australian subsidiary based on
the spot exchange rates at the time, which could change during the collection period. Daibochi currently has
about AU$2m yet to be collected as at 31 Mar 10. The company estimates that every 1 sen appreciation of RM
against AU$ will lead to further unrealised loss of RM20,000 for Daibochi. To minimise the impact on
unfavourable exchange rate movements for its AU$ exposure, Daibochi will be reducing the credit period granted
to its subsidiary company. As to a longer-term solution, Daibochi explained that it will be working out new terms
and conditions, to minimise its forex exposure to AU$. We have not input any forex gain / loss on the weakening
of AU$ against RM into our earnings forecasts as we consider such item as exceptional.

♦ Purchase of land for expansion? Daibochi explained that it was previously in negotiations to purchase a piece
of 7 acre land, situated nearby to its existing factory for expansion to accommodate new machineries for its
venture into the non-F&B segment. However, the negotiations have since been unsuccessful and as such,
Daibochi intends to expand its current factory instead. Timeline of this expansion has yet to be determined.
Following that, management has revised down its capex guidance to RM10m in FY10 (from RM12m). Thus, we
have revised our capex assumption for FY10 to be in line with management’s guidance. No changes to our FY11-
12 capex assumption of RM6.5m p.a..

♦ New F&B projects bearing fruit. Daibochi has recently locked-in contracts with two major MNCs in Australia,
for the production of “slider bags” for pet food and flexible packaging for dairy products, which will be
commencing in Jun 10. We estimate this to contribute about 2-3% of revenue and 4-5% of our current net profit
estimate in FY10. We are positive on this development as we believe that the tie-up with these MNCs (one being
a new client) could lead to more future contracts. We also understand that both companies have since
introduced new markets / products for Daibochi to test in / for.

♦ Visibility for non-F&B ventures becoming clearer. Daibochi will be obtaining the necessary certifications by
end-May earliest, for its electronics packaging. Management highlighted that the major differences between its
electronics packaging vs. other major players are: 1) its electronic packaging is independent of temperature and
humidity; and 2) unlike other electronic packaging, its product does not have a shelf life. The major challenge,
however, would be breaking through into the electronics industry, in which Daibochi is a new player. However,
Daibochi is looking to tie-up with distributors of electronics packaging products, and if successful, earnings
contribution could come in earliest by 2011. For its venture into the healthcare sector, we understand that the
visibility on the closure of this development is about 3 months, and we believe there would be more meaningful
developments in the next quarter. We have yet to input any contributions from the non-F&B segment into our
earnings forecasts and would only do so once it starts to kick-off.

Forecasts

♦ Forecasts. We have reduced our earnings forecasts by 4-5% in FY10-12 after: 1) reducing our capex
assumption for FY10; and 2) increasing our administrative expenses to be in line with FY09 numbers.

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 12 May 2010

Risk

♦ Risks to our view. The risks include: 1) sharp spike in raw material prices; 2) product contamination; 3) loss of
contracts from major customers; 4) shutdown / plant accidents; and 5) heavy reliance on one / more
customers.

Valuations and Recommendation

♦ Investment case. We still like Daibochi as we believe that the company creates new markets for themselves in
both the F&B and non-F&B sectors, which generate higher margins. Following our changes in earnings forecasts,
our target price is reduced to RM4.20 (from RM4.40) based on unchanged 12x FY12/10 EPS. Based on guided
net payout of 50%, this translates to attractive gross dividend yields of approximately 7-8% p.a., paid quarterly.
Maintain our Outperform recommendation on the stock.

Table 2. Earnings Forecasts Table 3: Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FY10F FY11F FY12F

Capacity ('m kg) 23.0 23.0 23.0

Turnover 221.8 250.2 270.1 281.7 Utilisation (%) 70 73 75
Turnover growth 2.1 12.8 8.0 4.3
(%)

Cost of Sales (182.8) (202.4) (217.6) (225.4)

Gross Profit 39.0 47.8 52.6 56.2

EBITDA 36.2 43.7 47.0 50.2

EBITDA margin (%) 16.3 17.5 17.4 17.8

Depr&Amor (8.1) (8.6) (9.0) (9.2)

Net Interest (0.8) (0.8) (1.0) (0.9)

Pretax Profit 27.1 34.2 37.0 39.9

Tax (6.8) (7.4) (8.0) 0.0

Minorities 0.4 0.8 0.8 1.0
Net Profit 22.8 26.6 28.8 31.0

Source: Company data, RHBRI estimates

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 12 May 2010

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
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contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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actions of third parties in this respect.

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