Wrestling with externalities for now

■ Daibochi’s 1QFY7/22 core net profit formed 25% of our FY7/22F forecast. Its elevated raw material costs negated the quarterly record sales achieved.
■ 1QFY7/22 results were within our expectation. We foresee Daibochi’s costs remaining heightened for now as global supply chain disruptions continue.
■ As Scientex failed to take Daibochi private, we revert to our previous TP basis of 18.6x CY23F P/E (10-year mean). Upgrade Daibochi to Add.

1QFY7/22 review: within expectation

Daibochi put on a decent showing in 1QFY7/22, in spite of the elevated raw material and logistics costs that have gripped the plastic converter industry. On a yoy basis, Daibochi’s 1QFY7/22 core net profit (after deducting a minute RM6,000 worth of fixed asset disposal gain) decreased by 23.3% to RM9.8m. We are not particularly alarmed by the yoy drop in bottomline, on the back of three reasons: i) 1QFY7/22 sales shot up by 15.2% yoy to a record quarterly high of RM180.3m, which indicates there is demand to fill its expanded capacity; ii) 1QFY7/22 core net profit was 10.3% higher qoq; and iii) pre-tax margin widened by 1.5% pts qoq (from 4QFY7/21’s 3.5%), which points to some cooldown in its heightened costs. Daibochi declared a 2.5 sen interim DPS in 1QFY7/22, which we take as a positive surprise, considering the group usually pays out dividends at fiscal year-end. All in all, we deem Daibochi’s 1QFY7/22 earnings as within our expectation; while 1QFY22 turnover was more than expected, it was offset by the higher operating costs, bringing core net profit to 25% of our full-year forecast (21% of Bloomberg consensus).

Exports nudged up, but any gains will be offset by higher costs

Daibochi achieved a record high quarterly revenue of RM180.3m in 1QFY7/22 despite its operations being affected in the quarter by Covid-19-related issues. The group also said, in its commentary for 1QFY7/22’s income statement, that the share of exports to total sales rose from 1QFY7/21’s 43.5% to 47.1%. Based on our back-of-the-envelope calculations, its export sales vaulted by 24.6% yoy, outpacing domestic sales’ +7.8% yoy in 1QFY22. Unfortunately, the export growth comes at a cost as the Covid-19 pandemic
has sent raw materials and logistics fees skyrocketing.

Upgrade to Add; bigger capacity to yield more sales

We make no changes to our forecasts. We expect its added capacity to continue to be filled further, while the elevated costs will fall in the long run. Scientex’s plan to privatise Daibochi was scotched by the poor take-up in Nov 2021; the former had only 71.9% stake in Daibochi when it needed at least 90% to privatise by the end of the take-over offer period. Hence, we revert to our previous TP valuation basis of 18.6x P/E (from the privatisation price), which is its 10-year average P/E, and roll over our base year to
CY23F. Our TP consequently rises to RM3.32. Downside risk: raw material and logistics prices spiking further. A catalyst is raw material prices and logistics costs ebbing.