PETALING JAYA: Dancomech Holdings Bhd, the manufacturer of various kinds of valves, displayed its resilience amid the slowing economy.
The company, which was listed five weeks ago announced a steady set of results for the second quarter ended June 30, 2016 on Friday.
For its second quarter to June 30, 2016, Dancomech recorded net profit of RM4.38mil on the back of RM18.19mil in revenue. Thus for the first half of 2016, it has recorded total net profit of RM7.13mil, which is some 63.6% of its full year net profit of RM11.21mil in 2015.
So not surprisingly, the stock has moved up some 50% to close Thursday at RM1.19 since its listing on July 21.
While its price spike could be partially due to the company’s small share base, investors could also be looking forward to Dancomech’s new expansion phase in Johor Bahru.
Furthermore, after three years of consecutive lower net profits, the second quarter results could be the start of a reversal on its results.
Dancomech is also intending to implement a dividend payout ratio of up to 30% of its future net profits to shareholders.
Dancomech, which was first established in 1989 is involved in the trading and distribution activities of the process control equipment (PCE) and measurement instruments market.
Started by Daniel Aik, the company expanded over the decades and is now run by the Aik Brothers. Today, Daniel is a managing director of the company, while younger brother Johnson is the executive director. In total, there are 7 Aik brothers thoughout the different subsidiaries of the companies.
Collectively, the Aik Brothers control some 73.16% of the company. Via the family vehicle ABC Equity Bhd which aptly stands for ‘Aik Brothers Company’, they control 41.57% of the company. Individually, the seven brothers, one sister and one brother-in-law control the remainder 31.59%.
Dancomech’s total enlarged issued and paid up capital comprise of 149 million shares. At its current share price of RM1.19, the company has a market capitalisation of RM175.82mil and is trading at a historical price earnings ratio of 13.42 times.
Today, Dancomech trades and distributes third party brands along with its own brands. Nonetheless, the company is able to command double digit margins thanks to its maintenance and after sales service contracts which currently contributes about 30% to its bottomline.
The majority of its customers are from industries such as palm oil and oleochemicals, oil and gas and petrochemical, water treatment and sewerage. For now, it has a diverse customer base of 1,459 customers from various industries.
The company hasn’t recorded any losses over the last 30 years, not even in 1997.
“We provide valves for factories - whether its in oil & gas, waterworks, heating, ventilation and air-conditioning (HVAC) or the palm oil industry,
As long as your factory is operating, you are going to need your valves to ensure your factory is running no matter what. So yes, we haven’t had any problems with our oil & gas clients too,” said Johnson.
Presently there are only four to five players in the valves business. Dancomech’s closest listed peer is Unimech Bhd.
For its year ended Dec 31, 2015, the company recorded net profit of RM11.21mil on the back of RM68.25mil in revenue. The company’s net profit would appear to be on a downtrend over the last 3 years, but this is mainly due to the completion of an exceptionally large contract order, relative to its other contracts, back in 2012.
Daniel explained that back in 2012, Dancomech secured its first purchase order valued at RM14.7mil to supply valves to KNM Group Bhd, an oil and gas company.
The company recorded net profit of RM25.87mil for its financial year (FY) ended Dec 31, 2013, and this reduced to RM14.18mil in FY14.
Daniel sees this trend reversing this year, simply because it has more contracts from a larger customer base.
He added that despite winning the RM14.7mil contract from KNM, the contribution from KNM to its total revenue for FY13 was only 15.12% and the total revenue contribution from its major customers only formed 29.56% of its total revenue. So it wasn’t as if Dancomech was singularly dependent on one customer.
“Even with KNM, we recorded an overall growth in our revenue between FY12 and FY14 from RM65.57mil to RM79mil. This demonstrates our ability in sustaining the business despite the absence of large purchase orders,” says Daniel.
The diversity in Dancomech’s product range is an important factor, as customers generally prefer to source their supplies from a single supplier.
Dancomech’s 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.
During its recent IPO, Dancomech raised RM18mil, out of which RM6.5mil has been earmarked for expansion - namely for the purchase of offices or a warehouse. Specifically, Dancomech is looking to spend some RM2.5mil for a new office cum store in Johor Bahru.
“Johor is an extremely important market for us. The setting up of a new office in Johor Bahru will enable us to implement our business strategies, expand our market coverage and customer base, as well as strengthen our position in Johor,” said Daniel.
Daniel said that there was already increased demand for its products in tandem with the on-going Refinery and Petrochemical Integrated Development (Rapid) project in Pengerang, Johor.