Dancomech Holdings Berhad – Betting on the Upcoming Free Warrants !

CO-Written by: Kar Jun & Humblepie

1.Company Profile:

It is a Malaysia-based company that was incorporated in Malaysia on 17 June 2013 as a public limited company lead by both its managing director Daniel Aik Swee Tong and executive director Johnson Aik Cwo Shing who have made it debuts in Bursa Malaysia in 2016.

2. Principal Activities of the Company:

The Group is engaged in the business of trading and distribution of process control equipment and measurement equipment such as valves, switches, actuators, bursting discs, float, gauges, recorders, pressure transmitters and so forth. Its products are either sourced from third party suppliers or original equipment manufacturers (OEM).

Pricing Analysis:

a)      Growth Potential:

In January 2017, Dancomech announced that it ventures into the business of pumps manufacturing. The Group paid RM4.25mil to have its own pumps business along with a factory that produces the pumps via acquiring Chun Khong Engineering Works Sdn Bhd, a company which owns a 99-year leasehold industrial land with single-storey industrial buildings in Perak. The earnings are expected to grow as this acquisition is immediately earnings accretive. The pumps business is largely controlled by two main players and the Group is now buying one of them, hence instantly making them a pump player. Also, the pumping business in Malaysia has a market size of approximately RM30 mil to RM40 mil per annum which the Group is anticipating to record 20% from the market or RM6-8 mil of the new business in 2017. Thereby, the group can record a further 10-20% of the market yearly.

Source from: http://www.thestar.com.my/business/business-news/2017/01/09/dancomech-ventures-into-valve-manufacturing/

b)         Financial Health Analysis:

i.     Income Statement:

                          i.      Net Profit Margin = 29.34%, - Very Good

                        ii.      Interest Coverage = 4,908 / 2 = 2,454x – Very Good !

                            iii.            Profit for the past 5 years= Not available, but by comparing 2 years’ revenue growth, it shows -12.09% year-to-year.

c)            Balance Sheet:

                          i.   Current Ratio = 4.87, Healthy!

                        ii.   Debts to Equity Ratio= 0.21, Healthy!

                      iii.   Trade and other receivable= declined slightly (Positive Note)

                      iv.   Bank borrowings= Declined (Positive Note)

d)           Cash Flow:

                       i.      Positive at least 1 year – Positive cash flow (Pass); Increased partly due to the net proceeds from issuance of shares

Therefore, Dancomech passed all my financial health ratios except for the revenue growth as only 4 quarters result are available.

e)            Pricing Analysis:

i.        Price to Book Value= 2.18 (high but acceptable as the company is growing)

ii.      Dividend Yield= 1.01% (for a company in high expansion mode, any dividends payout is a bonus).

 Dancomech has a 30% dividend payout policy.

iii.     PE Ratio = 17.29, high pricing as at 13/03/2017

iv.     Forecast future pricing by taking the average of 4 quarters and multiply on its growth rate as mentioned in the below:

Forecast Future Price= PE ratio divided by EPS * Growth rate

Averaged EPS (2.20+3.5+1.8+2.4) * 15% growth rate = 11.385 sen

P/E Ratio	Forecasted Price
X14	RM1.59
X15	RM1.70
X16	RM1.82
X17	RM1.93

v.    What is the main catalyst that driving the company to score such earnings?

The Group is expected to add an additional gross profit of RM1.8mil to RM2.4mil that derived from 30% typical margins of RM6-8mil of the new pumping business venturing for 2017. The Group aims to have a revenue growth of 5-10% at least for Indonesia this year. With a strong net cash position of RM44.9mil as at Sept 30 coupled with an annual operating cashflow of RM12-17mil, this allows management the flexibility to meet its annual capex requirement of RM3-4mil while maintaining a consistent dividend payout of 30%.

The Group is eyeing to register its growth of about 15% this year.

4. Conclusion & Personal Opinion:

The 2 main catalysts of 2017 for the Group have identified by the management which are 1) venturing into pumping business thereby selling it to local and Indonesia market where it aims to capture 5-10% revenue growth this year; 2) Catering potential customers from oil and gas players in Johor (Peninsular Malaysia) for RAPID project and, Lahad Datu and Bintulu (East Malaysia) by setting up distribution hub that is proximity to the key areas.

Warrants will be given for free on 18 May with the exercise price of RM0.30. Without the info of Implied Volatility, Effective Gearing and Delta, I am not able to calculate the Fair Value for the warrants. But looking at the current situation, the first trading should be able to hit limit up for the warrants follow by the next day trading range of 40 cents plus minus. The assumption for FV can’t be determined clearly as information is incomplete. For the shareholders, maybe you can look forward for the free warrants rather than to sell to market now!   

OCK- How Much Does The Warrant Worth?

Co- Written: By Alvin L & Humblepie (BBO Value Investing) 

After another record year in 2016, what’s next? OCK had successfully venture into Vietnam market, by acquiring Southeast Asia Telecommunication Holding Pte Ltd (SEATH), the largest independent base transceivers station (BTS) owner in Vietnam.  SEATH holds 100 per cent of three BTS owners in Vietnam: the VNC-55 Infrastructure JSC, the Mobile Information Service JSC, and the Global Infrastructure Investment JSC. They own and lease 1,938 BTS and over 150 in-building systems (IBS) for mobile network operators in Vietnam. SEATH average net-profit from 2013-2015 is RM7.4 mil, 2017 will be the first full year profit from SEATH.

Another successful strategy that OCK did was entering to Myanmar market, a population of 54mil and an average GDP growth rate of 7%. OCK having a Master Service Agreement with Telenor Myanmar for the construction and lease 920 telecommunication towers. It is believe that OCK will finish all the towers and pass to Telenor Myanmar this year. The deal is in a long-term "build and lease" business model that will deliver OCK rental income for 12 years, according to the agreement. Partnership with Telenor Myanmar is an advantage as the company currently operated the largest 3G network in Myanmar, and serves more than 12 million customers, and covers with its network over 60% of the population. For your information, Myanmar awarded its fourth - and final - telecoms license to Myanmar National Tele& Communication (MNTC).  It could increase the tenancy ratio of OCK to build and lease telecommunication towers to the company, as OCK had already established her name in Mynamar.

Telecommunication services still remains as the largest contributions for OCK, so venturing into emerging markets provides tons of opportunities for OCK. In Cambodia, the group’s project involving dredging and laying works for 800km of fiber for Telecom Cambodia, is at the tail end. So we won’t see much contribution for the group in 2017. On the other hand, Instead of owning its own telecoms towers and competing head-on with the giant tower companies in Indonesia, OCK will participate in the local market by providing the telcos there tower-management services, although the market was attractive. Today, OCK are the largest telecoms-managed services company in Indonesia, commanding 23% of the market by number of towers.

Key Question: Mother Price selling at 0.895 , how much does the warrants worth?

With the Implied Volatality of 29.52%, the Fair Value for OCK-Wa should be at 0.33 which is exactly the current closing price of OC-Wa. The market has priced in the the FV with no arbitrage opportunity. Talk about Efficient Market Hypothesis!   

Lately, RHB Research came out with the Target Price of OCK @ RM1.05. So, the golden question would be:

What is the FV for the warrants if OCK is trading at RM1.05?

The OCK- Wa will be worth RM0.46 which is is potential 40% upside from 0.33

Mother price will be gaining 16.6% with the same TP of RM1.05.

P/S: One of the reason on top of the leveraging concept for warrants trading, I am choosing the OCK Wa instead of the mother is because the low/negligible dividend payout. If you know what i means =)

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Sincerely,

Humble Pie

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The information is meant for the members of Bursa Blue Ocean (BBO). Disclosure and distribution of the message without the permission of BBO is prohibited. The full content of the article and write ups are for educational purposes only and should not be used as investment recommendations. We are not responsible for all investment activities conducted by the participants and cannot be held liable for any investment loss.

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https://www.facebook.com/myinvestcoach

Sincerely,

Humble Pie 

Disclaimer and Declaration

The information is meant for the members of Bursa Blue Ocean (BBO). Disclosure and distribution of the message without the permission of BBO is prohibited. The full content of the article and write ups are for educational purposes only and should not be used as investment recommendations. We are not responsible for all investment activities conducted by the participants and cannot be held liable for any investment loss.

Oceancash Pacific - Story That Many Have Overlooked

Company Profile

Oceancash is founded and led by Mr. Tan Siew Chin since year 1997 (Oceancash Felts Sdn Bhd) and listed on Bursa Mesdaq Market in year 2004. From 1997 to 2004, it is indeed a short 7 years to build a company from a Sdn Bhd to a Bhd.

What Oceancash do?

Extracted from Oceancash's Corporate Website:

Oceancash Felts Sdn. Bhd. (OFSB), a wholly owned subsidiary of Oceancash Pacific Berhad (OPB), is principally involved in the manufacturing of resinated felts and thermoplastic felts for heat insulation and sound insulation which include but not limited to; interior and exterior trims in automobiles, noise damper for compressors of split unit air conditioners as well as insulation in buildings including roofs, walls, partitions, and carpet underlay.

Oceancash Nonwoven Sdn. Bhd. (OCN), a wholly owned subsidiary of Oceancash Pacific Berhad (OPB), was incorporated on December 21, 1999 in Malaysia. The principal activities of OCN are in the manufacturing and trading of air-through bonded nonwoven, and thermal bonded nonwoven, which are widely used in the disposable hygienic products industry. Its application include top-sheets, second layer, acquisition distribution layer (ADL), and back-sheet for diapers, sanitary napkins, wet wipes, and surgical apparels including caps, masks, and gowns.

Why I like this company? She fulfilled the FA requirements that I am looking for and has a good growth story to tell. 

1^st Growth Potential After Additional RM14m Spend on PPE 

She has spend RM12.56m in year 2015 for PPE purposes (Figure 1). Talking about improving their upcoming revenue for the group level. =)
Key word : According to the Chairman, the PPE will be contributing postively in 2nd half of 2016. To look at the info in details, the breakdown for the 2 more signifinact investments for PPE are as per below:

RM9.1m for Plant and Machinery
RM4.1m for Building Under Construction

Under Accounting Treatment for Cash Flow, the column for 'Investing Activities' is good if it is in negative value. It means the company is spending monies to increase the potential income in the near future for Investment Activites via PPE. Definately it is fair for us to expect the company to achieve higher revenue and profits for 2nd half of 2016 onwards after much monies spend. By the way, we are waiting for 4th QR Report for 2016 right? =)
Additional note, receivables has gone down from Rm3.1m to Rm1.6m.  

Figure 1

Figure 2:

2^nd Financial Health Analysis

Figure 3:

Income Statement

Profit Margin = 8.57% - pass (<5% fail)

3.7% in year 2011 to 11% in year 2016 – It is in an increasing manner for the past 5 years (A job well done). From here i can see a good growth pattern.
CAGR of 19.9% from 2011 to 2016. (N =5, PV = 3.7, FV = 11)

Interest Cover = 8.7x - pass (<3x fail)

Profit for the past 5 years = Yes, steadily grow from RM2.15m in year 2011 to RM8.57m year LTM 12 months of 2016. Profits are compounded at 38.6% for the last 5 years. The profits are compunded at a slow and steady position. 

Balance Sheet

Current Ratio = 1.88x – pass (<1x fail)

Debts to Equity Ratio = 0.4x – pass (>3x fail)

Don't see the company is having liquidity problem for now.

Cash Flow

Positive at least 1 year = Pass


OCEANCASH PASSED ALL MY FINANCIAL HEALTH RATIOS !

3^rd. Pricing Analysis (Acceptable low PE!)

Price to Earnings or PE Ratio for 2016 = 

Using the Rolling 4 Quarters EPS: 3.932 = 0.395/3.932 = PE 10x (affordable and acceptable)

Forecast Future PE by using EPS 3 Quarters for 2016 and annualized it =4.13  

Forecast Future P/E = 0.395/4.13 X 100 = 9.5x (slightly lower than rolling 4 QR PE)

Let's look at the potential plus point: 
The projection of increase of EPS for final Quarter 2016 is doable. Why I say so?

Historical numbers:
9 months PAT for 2016 (Figure 4) = RM 6.932m
9 months PAT for 2015 (Figure 5) = RM 7.086m

A shortfall of RM0.154m for year 2016 compared to year 2015. 
THE BEST PART MOST OVERLOOK IS AT FIGURE 6, item B3: 

Figure 4:

Figure 5: 

Figure 6:

Look at what the Management Team said:

Baring unforeseen circunstances, performance for FY 2016 to be better than FY 2015.
Current 9 months of P&L, PAT for year 2016 is lower than 2015 at RM154k!

Assuming worst case scenario: If the Management guidance/projection is correct, the forecasted Final Quarter of 2016 should be AT LEAST to match the same earnings as 2016 (4th QR 2015) RM 1.836 + RM 0.154 (short fall of 9 months 2016 VS 2015)= RM1.99m 
BY RECORDING A PAT OF MINIMUM RM 1.99M FOR 4TH QR 2016: The 4th QR 2016 results will be better than 4th QR 2015.  

4. Catalysts for 2017:

There are 2 catalysts which catches my eyes for possible medium term investment. I have boxed it in black on Figure 7:

CATALYST 1: Potential good 4th QR 2016 Report

'Nonwoven division has ordered a spooling machine to upgrade its production capability'

'Expected increase in sales during the 2nd half of 2016'
From Figure 8: We can see that the QR Report for Q3 2016 is the highest Recorded which matches the statement given as per Figure 7. What do you think about the upcoming Q4 2016 Results? 

Figure 7:

Figure 8

Catalyst 2: Meeting the Profitability Test Record for Transfer to Main Market

Under Bursa Listing Requirement for Main Market, a company is qualified to be transferred to Main Board if the company is able to achieve an aggreagate of RM20m PAT from the lastest cumulative 3 years of annual report.

PAT 2014 = RM 4.91m (Figure 3)
PAT 2015 = RM 8.72m (Figure 3)

9 Months PAT 2016 = RM 6.932 (Figure 4 & 8)

Total PAT = RM 20.562m

The good part is, the RM20.562m has already being achieved without adding the final 4th QR 2016 report ! Any profits recorded in 4th QR 2016 Report will be a bonus.

Conclusion & Personal Opinion:

I like the solid fundamental numbers recorded since the year 2011 and having a continuous growth every year for the past 5 years. It has both Healthy Financial Ratios and Good Pricing. Involvement in overseas business has help her in increasing the forex gain in year 2016. The catalyst to be upgraded from ACE to Main Market entitles this company a chance to be a potential good stock to watch in 2017. It is a company suitable for low risk takers and medium investors. You can bank on the growth stories from her enlargement of PPE and Nonwoven business. Introduction of Bezza and Pesona in 2nd half of 2016 might potentially help this company too but I do not have the statistics of contribution to be added in to support this point. 

The bad side is the company is exposed to the currency risk. If RM is strengthening in 2017, then it will impact and reduce their P&L. The slow growth of vehicles sales in 2017 might dampen the growth for the Felts Division.
Another limitation is the forecast for 4th QR 2016 is based on personal opinion from the guidance from the Annual & Quarterly Report.

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Sincerely,

Humble Pie

Disclaimer and Declaration

The information is meant for the members of Bursa Blue Ocean (BBO). Disclosure and distribution of the message without the permission of BBO is prohibited. The full content of the article and write ups are for educational purposes only and should not be used as investment recommendations. We are not responsible for all investment activities conducted by the participants and cannot be held liable for any investment loss.