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!
