Dancomech ventures into valve manufacturing - Business News | The Star Online


Dancomech ventures into valve manufacturing

Top management: Daniel Aik (right) and Dancomech director Johnson Aik. The company is buying valves maker Chun Khong Engineering Works for RM4.25mil.

Top management: Daniel Aik (right) and Dancomech director Johnson Aik. The company is buying valves maker Chun Khong Engineering Works for RM4.25mil.

Deal comes only five months after its listing on Bursa

PETALING JAYA: Dancomech Holdings Bhd, which is the best-performing initial public offering (IPO) in 2016, has made its maiden acquisition, five months after its listing on July 21.

The valves company is venturing into the business of pumps manufacturing. Dancomech is paying RM4.25mil to have its own pumps business along with a factory that produces the pumps.

Dancomech’s share price has doubled to RM1.49 from its IPO price of 75 sen.

“We are very pleased with this acquisition. Firstly, this acquisition is immediately earnings accretive.

“The pumps business is largely controlled by two main players and we are now buying one of them, hence instantly making us a pump player,” Dancomech managing director Daniel Aik told StarBiz.

Last Thursday, Dancomech told Bursa Malaysia that it is paying RM4.25mil to acquire Chun Khong Engineering Works Sdn Bhd, a company which owns a 99-year leasehold industrial land with single-storey industrial buildings in Perak.

The land measures about 11,838.247 sq m. On this land, sits one block of detached office building, five blocks of detached factory buildings, one block of detached utility building and two blocks of store/storage buildings.

The valuation carried out by independent valuer Raine & Horne International Zaki + Partners Sdn Bhd gives the property a market value of RM4.5mil.

Aik explained that the pumps business in Malaysia has a size of roughly RM30mil to RM40mil per annum, and Dancomech intends to capture 20% of this market for a start. A 20% share would mean that Dancomech is eyeing some RM6mil to RM8mil of the business in 2017.

“Subsequently, we intend to capture a further 10% to 20% of the market every year,” he said.

Assuming margins of some 30%, which are typical margins for pump manufacturing, this would mean that Dancomech would record an additional gross profit of RM1.8mil to RM2.4mil from this new venture for 2017.

“With this acquisition and together with our existing valves business, we are hoping to grow Dancomech by some 10% to 20% every year,” said Aik.

For the nine months to Sep 30, 2016, Dancomech made a net profit of RM9.54mil on the back of revenue of RM45.98mil. It also declared its maiden dividend of 1.5 sen. Dancomech has a 30% dividend payout policy.

Dancomech trades and distributes third-party brands along with its own brands. However, it is able to differentiate itself from merely being a trading company because of its ability to garner maintenance contracts, particularly in the palm oil industry.

Thus, Dancomech has also been able to command double-digit margins. Its maintenance and after-sales service contracts currently contributes about 60% to profits.

It is also because of this that Dancomech has never generated a loss, simply because all the palm oil mills that buy valves from it automatically require yearly maintenance.

Currently, the majority of its customers are from industries such as palm oil and oleochemicals, oil and gas (O&G) and petrochemical, water treatment and sewerage. For now, it has a diverse base of 1,459 customers from various industries.

“There are some 2,000 palm oil mills which require some form of mainenance every year. Dancomech provides direct and indirect form of maintenance service to some 20% to 30% of these palm oil mills, and this number has been growing,” said Aik.

As Dancomech raised some RM18mil from its IPO exercise, it has RM31.31mil cash in its coffers as at Sept 30.

How does it intend to spend its money? Aik said its strategy is two-fold.

“Firstly, we are looking to make inroads into Indonesia for our valves and pumps business, particularly in the palm oil industry.

“Unlike the Malaysian market, where palm oil mills are reaching a point of saturation, Indonesia is still in a position where demand far outstrips supply. We are looking to get new Indonesian customers in 2017,” said Aik.

Secondly, Dancomech intends to improve its reach to clients in the oil and gas as well as downstream oil palm sectors.

Dancomech intends to set up service hubs in Sabah and Sarawak.

“We have earmarked two key locations – Lahad Datu, Sabah, and Bintulu, Sarawak – for our maiden East Malaysia distribution hubs.

“We prefer these locations because of their proximity to the palm oil and oleochemicals, O&G and petrochemical industries.

“In the Peninsular Malaysia, we plan to extend our services to Johor to cater to the potential demand growth from the Refinery and Petrochemical Integrated Development project,” it said.

The company has a strong balance sheet and is in a net cash position of RM44.9mil as at Sept 30 figures.

“Coupled with an annual operating cashflow of RM12mil to RM17mil, this will allow management the flexibility to meet its annual capex requirement of RM3mil to RM4mil while maintaining a consistent dividend payout of 30%.

“Its 30% dividend payout policy implies a prospective yield of 2%,” said UOB Kay Hian analyst Lester Chin in his report on the company.

Dancomech , pumps , valves