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DANCOMECH
PROCESS CONTROL EQUIPMENT DISTRIBUTION,
SINGAPORE JURONG PORT SUBCONTRACT,
PLUS
METAL FABRICATION PROFITABLE VENTURE
EXISTING BUSINESS - CONTROL EQUIPMENT DISTRIBUTION
DANCO trades and distributes process control equipment and measurement instruments for palm oil, oleochemical, construction, and various engineering industries.
RM36.5 million SUBCONTRACT AT SINGAPORE JURONG PORT
On Sep 7, DANCO bagged a sub-contract worth S$12.01 million (RM36.5 million) at Jurong Port in Singapore. According to DANCO management, the subcontract:
- Which includes the design and supply of material handling equipment, will be completed by January 2022
- Is expected to contribute positively to its earnings and net assets in the upcoming quarters
NEW & PROFITABLE BUSINESS - METAL FABRICATION
On Aug 3, DANCO acquired 70% of MTL Engineering and started its profitable venture into metal fabrication (What UWC and NOTION is involved in), metal stamping, tool and die making.
According to DANCO management, MTL Engineering:
- Will start contributing to DANCO's earnings in coming quarters. MTL Engineering has been consistently profitable in the past 3 years.
- Gives DANCO the opportunity to move into new business areas such as air conditioning, automotive and furniture component businesses and enables some cross-selling of products between both groups
RESILIENT BUSINESS, UNAFFECTED BY MCO
Interestingly, DANCO’s revenue and earnings are not impacted by MCO. Their existing business, trading and distribution of process control equipment are required by their clients all the time, regardless of economic cycle.
“We can still hope to grow even in the current slowdown because we are involved in many industries, not just a few,” Tang tells StarBizWeek.
NET-CASH RM40 million, READY TO SEIZE OPPORTUNITIES
With RM40mil in net cash, chief financial officer Tang Yuen Kin says the company, which trades and distributes process control equipment and measurement instruments for various industries will evaluate opportunities that it feels can add value to the company.
DECENT FUNDAMENTALS
- DANCO has achieved growing revenues since 2016. While earnings fluctuate minimally, they are on an upward trajectory.
- DANCO is a net cash company with RM40 million cash to seize growth opportunities.
- DANCO has a decent ROE of 9.88%. DANCO is good at generating returns using shareholder equities.
- DANCO has a strong current ratio of 8x. It has zero issues meeting short (and long) term financial obligations.
BUSINESS RISKS
DANCO’s process control equipment trading and distribution business could be impacted by unforeseen black swan events. DANCO’s metal fabrication business could underperform. DANCO’s Jurong Port subcontract may not be completed as targeted.
VALUATION
Based on our guesstimates and calculation, DANCO stands a chance to achieve around RM20 million earnings in the next 4 four quarters.
Earnings Contributed by:
-
Business #1: Trading & Distribution of Process Control Equipment = RM15.0 million (Assuming same earnings as FY2019)
-
Business #2: Singapore Jurong Port Subcontract = RM3.5 million
(Contract size RM36.5 million, assuming 12% net profit margin, subsdiary 55% owned by DANCO)
-
Business #3: MTL Engineering = RM2.4 million
(Assuming same earnings as FY2019, 70% owned by DANCO)
-
Estimated total earnings in the next fourters
= RM (15.0 + 3.5 + 2.4)
= RM 20.9 million
= Around RM 20 million
An annual earnings of RM20 million would give DANCO an EPS of 6.58sen.
At current share price of RM0.615, DANCO is being traded at a forward 1-year PER of only 9.35x.
- At a 1-year forward PER of 10 times, DANCO’s share price is worth RM0.66.
- At a 1-year forward PER of 12 times, DANCO’s share price is worth RM0.79.
- At a 1-year forward PER of 15 times, DANCO’s share price is worth RM0.99.
DANCO, who is partly involved in the metal fabrication business, is being traded at a PER of 14 times.
On the other hand, NOTION and UWC, who are largely/wholly involved in metal fabrication business, is being traded at PERs of 47 and 63 times, respectively.
How would Mr. Market value DANCO?
Let’s let Mr. Market decide.
TECHNICAL OBSERVATION: 2x BREAKOUT COMBO, THEN RETRACED & CLOSED 12% ABOVE OPEN PRICE.
On October 12, DANCO had a technical breakout from its RM0.55 resistance. Then, it surged and had another breakout from its RM0.635 resistance. MACD golden cross is taking place too. Then, selling force kicked in. DANCO closed at RM0.615, which is 11.8% above its open price.
Going forward, how would DANCO’s share price move?
Let's let Mr. Market decide.
DISCLAIMER
Our study notes are for sharing purpose only. We could be inaccurate. There is no buy/sell recommendation.
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https://klse.i3investor.com/blogs/jomnterry/2020-10-13-story-h1534614008-DANCOMECH_HOLDINGS_BERHAD_5276_IS_IT_UNDERVALUED.jsp
