PP 7767/09/2010(025354)

29 July 2010

Malaysia Corporate Highlights

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

R e su l ts N o t e
29 July 2010
MARKET DATELINE

Daibochi Share Price

Fair Value
:
:
RM3.33
RM3.83
Rising Raw Material Costs Weigh Down Earnings Recom : Outperform
(Maintained)

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 10.7 - 4.2 0.1 18.3 6.0
2010f 250.6 22.1 29.2 -2.8 11.4 36.0 3.7 0.1 16.5 5.6
2011f 270.6 24.2 31.9 9.3 10.5 39.0 3.2 net cash 16.6 6.0
2012f 282.1 26.8 35.3 10.9 9.4 43.0 2.7 net cash 16.8 6.4
Main Board Listing / Trustee Stock * Consensus Based On IBES Estimates

♦ Below expectations. Daibochi’s 2QFY10 net profit of RM4.2m (-16.5% qoq RHBRI Vs. Consensus
and -30.8% yoy) was below our and consensus expectations, resulting in Above
1HFY10 profits accounting for only 34% of our and consensus full year net In Line
profit forecasts. This was caused by lower-than-expected operating margins Below
and higher-than-expected effective tax rate. Daibochi declared a second
interim tax-exempt dividend of 2.5 sen, bringing the total YTD dividend to 6 Issued Capital (m shares) 75.9
sen. Market Cap (RMm) 252.8
Daily Trading Vol (m shs) 0.04
♦ Lag in passing on raw material costs. As with the 1Q results, Daibochi’s 52wk Price Range (RM) 1.33-3.87
operating margins were affected by the three-month lag in passing on rising Major Shareholders: (%)
raw material costs to customers, which saw margins fall to 10.4% in 1H10 Low Chan Tian 11.6
(from 12.2% in 1H09). We understand that Daibochi has already increased Datuk Wong Soon Lim 6.5
its selling prices by an estimated 4-5% to cover the rising costs during the
2Q. However, going forward, if raw material costs were to rise further in the FYE Dec FY10 FY11 FY12
EPS chg (%) (16.9) (16.1) (13.3)
3Q and 4Q, we believe operating margins will continue to be low at
Var to Cons (%) (18.9) (18.2) (17.9)
approximately 10-11%. As management does not generally keep a
significant level of raw material stock on hand, we have thus revised
PE Band Chart
upwards our raw material costs projections to be on the conservative side,
effectively reducing our forecasted operating margins to 11.8-12.7% p.a.
PER = 11x
for FY10-12, from 14-14.5% p.a. previously. PER = 8x
PER = 5x
♦ Topline growth not much of a concern, as we believe that Daibochi’s
sales volume would continue to grow from new contracts from existing and
new customers in both F&B and non-F&B segments. We are expecting
further exciting developments in 2H FY12/10 with regards to Daibochi’s new
ventures, such as its electronic packaging products. We understand that
contribution from its electronics packaging products will come in by end Relative Performance To FBM KLCI
FY12/10 onwards.

♦ Risks. The risks include: 1) sharp spike in raw material prices; 2) product
Daibochi
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 FY10-12 earnings forecast by 13.3-16.9%

p.a. after revising upwards our raw material costs projections. FBM KLCI

♦ Investment case. We are rolling forward our valuation target to FY11

(from FY10 previously) based on our revised FY12/11 EPS and peg to an
unchanged target PER of 12x, arriving at a fair value of RM3.83 (from
RM4.20 previously). We continue to like Daibochi as rising costs aside; it
has demonstrated its ability to grow its revenue base through continuous
Hoe Lee Leng
emphasis on product innovation, while also capturing more overseas
(603) 92802641
customers. Although we have aggressively trimmed our forecasts, we
hoe.lee.leng@rhb.com.my
maintain an Outperform call on the stock due to its current low valuations,
which implies a 15% upside to our fair value.

Please read important disclosures at the end of this report.

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Table 2: Earnings Reviews (YoY Cumulative)

FYE Dec (RMm) 4Q09 1Q10 2Q10 QoQ YoY 1HFY09 1HFY10 YoY Comments
(%) (%) (%)
Revenue 54.6 59.7 61.2 2.5 12.1 113.4 120.9 6.6 Marginal increase in revenue due
to higher sales volume as Daibochi
continues to expand its revenue
base.

EBIT 6.9 6.6 5.9 (10.0) (13.9) 13.8 12.6 (8.9) Refer to EBIT margin.

Finance cost (0.1) (0.2) (0.2) 38.7 94.2 (0.6) (0.4) (28.0)
Associate 0.1 (0.1) (0.0) (92.4) (108.0) (0.2) (0.1) (39.3) Smaller loss from its associate
company engaged in property.

PBT 6.9 6.4 5.7 (10.1) (17.0) 13.1 12.1 (7.7) Filtered down from EBIT and lower
finance cost.
Taxation (0.8) (1.2) (1.5) 24.8 91.2 (2.0) (2.6) 30.0
MI (0.1) (0.2) (0.1) (63.5) 1.7 (0.3) (0.2) (11.3)
Net profit 6.1 5.0 4.2 (16.5) (30.8) 10.8 9.2 (14.7) Filtered down from PBT and higher
effective tax rate.

EPS (sen) 8.0 6.6 5.5 (16.5) (30.8) 14.2 12.3 (13.6)
Net DPS (sen) 6.5 3.5 2.5 (28.6) (61.5) 10.0 6.0 (40.0) Interim net dividend of 6 sen was
declared in 2QFY0.

EBIT margin (%) 12.7 11.1 9.7 (12.2) (23.2) 12.2 10.4 (1.8) EBIT margin contracted due to
selling price increase lagging
behind rising raw materials cost

PBT margin (%) 12.6 10.6 9.3 (12.3) (25.9) 11.5 10.0 (1.5)

Net profit margin 11.1 8.4 6.8 (18.5) (38.3) 9.5 7.6 (1.9)
(%)
Effective tax rate (11.1) (18.4) (25.6) 38.9 130.4 (15.5) (21.8) (6.3) Higher effective tax rate due to
(%) lower tax incentives.
Source: Company; RHBRI

Table 3. Earnings Forecasts Table 4: Forecast Assumptions

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

Capacity ('m kg) 23.0 23.0 23.0

Turnover 221.8 250.6 270.6 282.1 Utilisation (%) 70 73 75
Turnover growth 2.1 13.0 8.0 4.3
(%)

Cost of Sales (182.8) (208.5) (223.8) (231.1)

Gross Profit 39.0 42.2 46.8 51.1

EBITDA 36.4 38.1 41.2 45.0

EBITDA margin (%) 16.4 15.2 15.2 16.0

Depr&Amor (8.3) (8.6) (9.0) (9.2)

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

Pretax Profit 27.1 28.6 31.2 34.8

Tax (7.2) (6.2) (7.0) 0.0

Minorities 0.4 0.8 0.8 1.0
Net Profit 22.8 22.1 24.2 26.8

Source: Company data, RHBRI estimates

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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
and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be
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
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
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This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

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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securities, subject to the duties of confidentiality, will be made available upon request.

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actions of third parties in this respect.

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