KUALA LUMPUR: MIDF Research has placed a fair value of 76 sen to 91 sen per share for Dancomech Holdings
Bhd based on FY17 forecast earnings per share of 7.58 sen.
“We derived the fair value range of 76 sen to 91 sen per share from a price-earnings ratio (PER) range of 10 times to 12 times.
“This range is within the FBM Small Cap Index’s 5-year historical PE band of between a low of 7.39 times and a high of 29.94 times. The index’s average PER for the 5-year period was 14.74 times,” MIDF said.
The research house said Dancomech’s Malaysian peers, Unimech Group Bhd
was trading at a forward PER of 14.75 times while Pantech Group Holdings Bhd
was trading at a forward PER of 8.3 times.
“We note that Unimech and Pantech have different profiles when it comes to their industrial exposure while they also manufacture their own products. Hence, the PER of 10 times to 12 times is justified based on Dancomech’s healthy financial position and viable expansion plans, which will in turn provide growth prospects.
“The proposed dividend plan will be a sweetener for shareholders,” MIDF said.
Dancomech, which is expected to be listed on July 21, mainly trades and distributes third party brands of process control equipment (PCE) and measurement instruments.
MIDF said Dancomech’s gross gearing level was healthy at 0.11 times. It is also sitting on a pre-IPO sizeable cashpile of RM27.9mil, which translates into 18.7sen per share.
Post-listing, it will be in a net cash position (after paring down borrowings and listing expenses) of RM40.1mil.
“Based on the assumption of a 30% payout, we are estimating a dividend yield of approximately 3% in FY17 forecast. Interestingly, Dancomech’s cash and cash equivalents have been growing steadily in the past three years, with a CAGR of 19.1% from FY13-FY15.
“The company’s profit recorded a jump of 69% in FY13 partially due to a one-off gain of RM8.44m from disposal of assets. Stripping off the one-off gain, earnings rose only by 14% year-on-year, which is still commendable,” MIDF said.
Dancomech also sells its in-house brands, namely WAGI, VMX and Omaval. Altogether, they contributed RM24.95mil or 29.99% of FY13 revenue, RM25.1mil or 31.77% of FY14 revenue, and RM26.64mil or 39.02% of FY15 revenue.
The increasing higher contribution of the in-house brand suggests that Dancomech’s products are well-received. Going forward, the group will continue to grow its in-house brand offering.
“We view this positively as it will have more control over the costs and margins of its own products. It outsources the manufacturing of the in-house brands to overseas third party suppliers and OEMs,” MIDF said.
Dancomech commands a market share of 3-5% in Malaysia as the overall market is fragmented.
The research house believed that the recent improvement in prices of commodities like crude oil and crude palm oil should have a positive spillover to Dancomech.
It added that the company’s growth prospects are tied to the outlook of these two sectors.
According to an IMR report, the market size for the PCE and measurement instrument market for industrial pipeline systems in Malaysia is RM2.17bil in 2015.
It is expected to grow 2% to RM2.22bil in 2016, 3.1% to RM2.29bil in 2017 and 3.4% to RM2.36bil in 2018. The CAGR for the market is 3.2% from 2016 to 2020.
MIDF said while huge projects bode well for Dancomech’s earnings, one of the main reasons it saw a strong growth in FY13 top and bottomline is due to the large order it secured from KNM Group.
Orders from KNM Group contributed approximately 15% or RM12.48mil to Dancomech’s FY13 revenue. For FY14, earnings fell by 46% due to the absence of a big order.
“On the flipside, the group does not rely on any single major customer for its revenue. That is because none of its single customer contributes up to 10% or more to its topline generally. The company does not have long-term contracts with its customers,” MIDF noted.