UOB Kay Hian: Dancomech's earnings to grow at CAGR of 14%

PETALING JAYA: Dancomech Holdings Bhd’s earnings is expected to register an annual growth rate of 14% for the next three years driven by demand recovery in the oil and gas (O&G) sector as well as from its recent acquisitions, according to UOB Kay Hian Research.

The research house initiated coverage on Dancomech with the expectation that the company would experience “significant growth” starting from the first half of this year.

“With the anticipated reopening of the global economy that accompanies the dispensation of Covid-19 vaccines, Dancomech is looking forward to enjoying brisk demand growth over the next couple of years arising from numerous factors such as demand recoveries from its key customers from the O&G sectors which have earlier been badly impacted by the Covid-19 pandemic and contributions from the newly-bagged subcontract at Jurong Port,” it said in a report.

In addition, UOB Kay Hian said Dancomech’s earnings would be driven from its newly-acquired 70%-owned subsidiary MTL Engineering and potential growth in orderbook from the upcoming water treatment and sewerage plants’ capacity expansion.

We estimate Dancomech to register core net profit of RM23mil and RM24mil in 2021 and 2022, respectively, which implies a three-year compounded annual growth rate (CAGR) of 14% in 2020 to 2022. This is on the back of a three-year revenue CAGR of 15%," it said.

Dancomech trades and supplies equipment to varied segments including those involved in oleochemicals, palm oil refineries as well as engineering, procurement, construction and commissioning (EPCC) works.

UOB Kay Hian said while Dancomech supplies most of its products to the plantation industry especially to palm oil mills and oleochemical plants and O&G industry, it also supplies to other sectors such as water treatment plants and general industries.

“Dancomech is poised to capture the growth in sales of its process control equipment and measurement instruments, riding on the ramp-up of business activities as well as expansion of its vendors from various industries,” it said.

It initiated coverage on Dancomech with a “buy” call with a target price of 70 sen per share based on 10 times fully diluted 2021 forecast price-earnings ratio (PE) plus post-warrant conversion net cash of RM92mil, which is equivalent to 20 sen per share for the enlarged share base.

In August last year, Dancomech completed the acquisition of MTL Engineering that has allowed it to go into metal fabrication, metal stamping, tool and die making.

UOB Kay Hian said the acquisition of MLT is expected to contribute RM4mil to Dancomech’s 2021 bottomline.

It pointed out that Dancomech is sitting on sizeable cash reserves with capital management thanks to its business model that provides customised solutions to match clients’ needs and budget.

“This promises healthy cash flow streams and minimises trade receivables defaults, allowing steady accumulation of cash reserves,” it said.

UOB Kay Hian does not rule out the fact that Dancomech may distribute a special dividend out of its reserves.

“While Dancomech adopts a tight capex regiment, we expect the company to significantly improve its dividend payout over time.”

“This implies significant upside to its 2021 prospective yield of 4.7%. Our assessment takes into account its current lush net cash position of RM35mil (11sen per share),” it said.

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