The adoption of metallized packaging technology and lower raw material prices have contributed to Daibochi’s 143% jump in 1HFY09 earnings against an organic revenue growth of 6.5% over the same period. We believe Daibochi would be able to match this strong growth in 2HFY09. With more than 90% of its revenue derived from the resilient food and beverage industry and the adoption of more cost-efficient packaging technology, Daibochi should be able to continue growing its earnings in FY10, provided that plastic resin prices do not spike up as in 2007. Pegging a fair 8x FY10 PER, we arrive at an indicative fair value of RM2.50. The share’s net dividend yield is expected to be about 6% for FY09 and FY10 at our fair value.
Doing business with big brand names. Daibochi’s flexible packaging solutions are used
by some of Malaysia’s biggest MNCs in food. The company is the largest supplier of
Nestle’s Milo packaging in Asean. It is also the sole flexible packaging supplier to Nestle’s
Chembong confectionery factory in Malaysia, which is also the MNC’s regional hub.
Daibochi also supplies more than 90% of Cadbury’s flexible packaging in Malaysia. The
company is also the sole supplier of flexible packaging for Kraft’s Danone product series in
Malaysia. Other major customers are Munchy’s and London Biscuits.
Sustainable earnings growth. Daibochi’s revenue has been on the rise every year since
FY98, except for a 4% drop in FY07. It has been profitable since at least FY97 and even
during the 1997/1998 Asian Financial Crisis, 2000 technology bubble and 2008 global
financial crisis. This record speaks volumes of the resilience of Daibochi’s business. Due to
the higher revenue arising from the use of more cost efficient metallized packaging and the
company’s exposure to the country’s biggest brand names in food, we believe Daibochi
should be able to achieve sustainable earnings growth, so long as plastic resin prices do
not shoot up as sharply as in 2007. That said, the company had early this year negotiated a
transfer-pricing mechanism with customers contributing about 50% of its revenue. This
ensures that its earnings would be less volatile should raw material prices escalate.
FY98, except for a 4% drop in FY07. It has been profitable since at least FY97 and even
during the 1997/1998 Asian Financial Crisis, 2000 technology bubble and 2008 global
financial crisis. This record speaks volumes of the resilience of Daibochi’s business. Due to
the higher revenue arising from the use of more cost efficient metallized packaging and the
company’s exposure to the country’s biggest brand names in food, we believe Daibochi
should be able to achieve sustainable earnings growth, so long as plastic resin prices do
not shoot up as sharply as in 2007. That said, the company had early this year negotiated a
transfer-pricing mechanism with customers contributing about 50% of its revenue. This
ensures that its earnings would be less volatile should raw material prices escalate.
BAT and Australia market. On top of organic growth from its local business with existing
customers, Daibochi’s recent qualification by British American Tobacco and penetration of
the Australian market could be its future main earnings growth drivers. Its qualification as
BAT’s regional supplier of flexible packaging for cigarette packs, although still at an early
stage, could potentially become a big business from 2HFY10 onwards. Also, having
explored the Australian market for several years, and having sales and technical teams as
well as a warehouse in that country, Daibochi is beginning to gain business from renowned
brand names in dairy/cheese and pet food.
customers, Daibochi’s recent qualification by British American Tobacco and penetration of
the Australian market could be its future main earnings growth drivers. Its qualification as
BAT’s regional supplier of flexible packaging for cigarette packs, although still at an early
stage, could potentially become a big business from 2HFY10 onwards. Also, having
explored the Australian market for several years, and having sales and technical teams as
well as a warehouse in that country, Daibochi is beginning to gain business from renowned
brand names in dairy/cheese and pet food.