Daibochi - Contract negotiations hold promise (CIMB)

Daibochi’s prospects for 2011 look promising as its negotiations with some of its new or potential MNC customers such as BAT, Pepsico and major E&E companies are going well, suggesting that it could secure some major contracts, possibly later this year. Although raw material prices continued to head higher in 1Q11, the company was able to pass the costs on to its customers. We maintain our FY11-12 EPS forecasts while noting that the potential for upside if the company clinches some major contracts over the next few quarters. This could catalyse the stock, along with margin recovery and the attractive dividend yields of 8-9%. We reiterate our OUTPERFORM rating and target price of RM3.92, which is based on a 30% discount to our CY12 target market P/E of 14.5x. Daibochi remains our top pick in the packaging sector.