PUBLIC INVESTMENT BANK PublicInvest Research IPO Note Monday, July 11, 2016 KDN PP17686/03/2013(032117) DANCOMECH HOLDINGS BERHAD Fair Value: RM0.80 DESCRIPTION Process Control Equipment Distributor Primarily involved in the trading and distribution of third party and own brand PCE and measurement instruments. Fair Value RM0.80 Indicative Retail Price RM0.75 Expected Return 6.4% Closing Application Date Retail 12 July 2016 Institutional - Indicative Listing Date 21 July 2016 Market Main Sector Trading/Services Bursa Code 5276 Bloomberg Ticker DMEC MK Shariah-compliant No IPO DETAILS Shares(m) Offer for Sale 16.0 Public Issue 24.0 UTILISATION OF PROCEEDS RM (m) Repayment of bank borrowing 4.6 Capital expenditure 6.5 R&D expenditure 1.0 Working capital 2.7 Estimated listing expenses 3.2 Total 18.0 KEY STOCK DATA Market Capitalisation (RM m) No. of Shares (m) MAJOR SHAREHOLDERS (Post-IPO)* 111.8 149.0 % ABC Equity 41.6 Aik Swee Tong 6.6 Aik Cwo Shing 6.6 Dancomech Holdings Berhad, a distributor of process control equipment (PCE) and measurement instrument with 27 years experience, is slated for listing on the Main Market of Bursa Malaysia on 21 July 2016. The group is raising RM18.0m from the issuance of 24m new shares. Amidst the challenging economic outlook and softening oil prices, we expect FY16 core earnings to be flattish, though helped somewhat by valve replacement jobs in the water and sewerage industries. Our fair value for Dancomech is RM0.80, based on a 10x PE multiple to its estimated FY17 EPS of 7.9sen. Background. Dancomech is primarily involved in the trading and distribution of process control equipment (PCE) and measurement instruments. Apart from distribution of third party products, it also distributes its own brands, WAGI, VMX, and Ovamal, which are sourced on an Original Equipment Manufacturer (OEM) basis from China and Taiwan. Its products are focused mainly in the palm oil and oleochemicals, oil and gas and petrochemicals, and water treatment and sewerage industries. The group currently has 7 exclusive distributorship rights and 11 other distributorship rights by its suppliers, carrying 12 PCE product categories and 5 product categories of measurement instruments inventory, and delivering to 1,459 customers from various industries. Future plans. The group plans to i) expand its distribution network to Bintulu, Sarawak and Lahad Datu, Sabah, ii) upgrade its testing lab and intends to become a Leser Authorised Repair Centre (LARC) which could enhance its after-sales service capabilities, iii) set up a new stainless steel flexible hose assembly line, iv) broaden its product portfolio by acquiring distribution rights from existing and new suppliers as well as develop new products under its own brands which provide better margins. 30% dividend payout policy. The group expects to have a dividend payout up to 30% of its profit after tax (PAT) subject to its cash flow and earnings. We estimate dividend yield for FY16 and FY17 at 2.2% and 3.0% respectively on the back of a 30% dividend payout assumption. Key risks for Dancomech include i) fluctuations in foreign currency exchange as majority of its cost of sales are denominated in US Dollars, ii) high dependency on third party suppliers, iii) absence of long term contracts with customers, iv) unfavourable commodity prices which could affect product demand. KEY FINANCIAL SUMMARY (RM m) Research Team T 603 2268 3000 F 603 2268 3014 E research@publicinvestbank.com.my FYE Dec (RM m) 2013A 2014A 2015A 2016F 2017F CAGR Revenue 83.2 79.0 68.3 69.8 73.1-3.2% Gross Profit 29.9 27.5 21.7 22.1 23.3-6.1% Pre-tax Profit 31.5 19.6 15.3 11.2 15.8-15.9% Net Profit 25.3 14.3 11.0 8.3 11.6-17.7% EPS (Sen) 17.1 9.7 7.5 5.7 8.0-17.4% P/E (x) 4.4 7.7 10.0 13.3 9.4 DPS (Sen) - 0.2 1.0 0.3 1.7 Dividend Yield (%) 0% 0% 1% 0% 2% Source: Company, PublicInvestResearch estimates 1 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 1 of 9
Company Overview Primarily involved in the trading and distribution of third party and own brand PCE and measurement instruments Introduced its own brand WAGI, VMX and Omaval Has 7 exclusive distributorship rights Dancomech Holdings Berhad was incorporated on 17 June 2013. It is primarily involved in the trading and distribution of third party and own brand PCE and measurement instruments. It focuses mainly on the palm oil and oleochemicals, oil and gas and petrochemical, and water treatment and sewerage industries. Dancomech sources its products directly from foreign manufacturers in Taiwan, Japan and China, amongst others. Apart from the distribution of third party brands, it introduced its own brand WAGI (for valves only, used in palm oil and petrochemicals industries), VMX (for PCE and measurement instruments which are used in general and other industries) and Omaval (for valves used in the palm oil and oleochemicals industry). It has a pool of 24 OEM suppliers based in China and Taiwan. In 2015, it successfully expanded its product range with the supply of Mechanical Power Transmission Equipment (MPTE), in particular pumps, to the palm oil and oleochemicals industry subsequent to the acquisition of distribution rights from KSB Malaysia Pumps & Valves Sdn Bhd. The group currently has 7 exclusive distributorship rights and 11 other distributorship rights by its suppliers, carrying 12 PCE product categories and 5 product categories of measurement instruments inventory, and delivering to 1,459 customers from various industries. Figure 1: Corporate Structure Dancomech Dancomech Engineering (i) Optimis (ii) Dancomech JB (iii) Note: i. Involved in the trading and distribution of PCE and measurement instruments ii. Involved in the trading and distribution of PCE and measurement instruments to the water industry iii. Involved in the trading and distribution of PCE and measurement instruments in Johor. Figure 2: Key Achievements Year Key Achievements 1992 Secured first major purchase order worth RM600,000 for supply of PCE to Genting Sanyen Paperboard Sdn Bhd. Appointed as an approved vendor to supply British Rototherm Co. 1995 Ltd equipment pressure and temperature recorders to c.60 of FELDA s palm oil mills Appointed as Malaysia s sole agent for Ayvaz Ltd. from Turkey, to supply steam traps and expansion joints. 1997 Appointed as Malaysia s sole agent for Korea Steel Power Corporation, to supply tank protection venting devices for oil and gas industry. Appointed as Malaysia s authorised distributor for Neway Valve (Suzhou) Co. Ltd. from China, to supply various type of valves 2001 under Neway brand. Renewed appointment as an authorised distributor by Neway Valve (Singapore). Tenure of the appointment is until 31 December 2016. Appointed as Malaysia s agent for Power Genex Ltd. from South 2005 Korea to supply positioners and switches. Tenure expires 21 August 2017. 2 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 2 of 9
2007 2008 2009 2015 Introduced own brand, WAGI, for valves. Appointed as an exclusive representative in Malaysia by Korea Steel Power Corporation to supply tank protection venting devices. Secured a total RM3.5m order from KNM Process Systems Sdn Bhd and PT Wilmar Nabati to supply valves. Introduced own brand VMX, which deals mainly in valves. Appointed as Malaysia s authorised distributor for British Rototherm Co. Ltd. Introduced own brand Omaval, which mainly carries PCE Appointed as an exclusive agent for Peninsular Malaysia by KSB Malaysia Pumps & Valves Sdn Bhd to supply pumps under the KSB brand. Tenure appointment is for 2 years until 20 October 2017. More than 50% of its revenue is derived from the palm oil and oleochemicals industry Customers. More than 50% of its revenue is derived from the palm oil and oleochemicals industry. The declining trend in crude oil prices has adversely affected contributions from the oil and gas industry, dropped from 27% in FY13 to 14% in FY15. To mitigate the negative effects however, the group has been focusing on marketing to other industries, particularly water treatment. Customers will also benefit from its pre-sales and after-sales services such as consultation, customization and troubleshooting. Figure 3: Revenue Contribution by Customers EPCC Contractors and Contractors 36% OEM 12% Traders and Distributors 24% End User 28% Figure 4: Revenue Breakdown by Industry Palm oil and oleochemicals Water treatment and sewerage Oil and gas and petrochemical Others 100% 80% 60% 23% 18% 19% 22% 3% 3% 4% 5% 15% 27% 19% 14% 40% 20% 59% 52% 58% 59% 0% 2012 2013 2014 2015 3 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 3 of 9
Future Plans East Malaysia filled with resources and projects Time required for testing and checking can be reduced, modifications can also be made Able to customize its stainless steel flexible hose Eyeing distribution rights from new suppliers and developing new products under own brands Expanding into East Malaysia. Filled with resources and projects, East Malaysia provides opportunities for the group to further expand its trading business. It plans to venture into Lahad Datu, Sabah and Bintulu, Sarawak by setting up offices with stores, to expand into the palm oil, oleochemicals and oil and gas industries in East Malaysia. Upgrading of testing lab. The group is allocating RM0.50m to upgrade its testing lab within a year, with new additional fittings, tools and machineries. The facility will be used for the Leser brand safety valve testing purposes, while also enhancing its after-sales service capabilities from becoming a Leser Authorised Repair Centre (LARC) with a proper testing lab. Time required for testing and checking can be reduced through usage of its own lab instead of suppliers testing labs in Germany and Singapore. Different pressure settings can also be adjusted through its own testing lab, allowing it to make various modifications to existing stock without the need of having to order new products, thereby lowering inventory cost. Setting-up new assembly line. The group is allocating RM0.50m to install a new assembly line which is equipped with several tools and machineries. With the new assembly line, the group is able to customize its stainless steel flexible hose according to customers requirements, particularly in palm oil refineries. Expanding product range. To-date, the group is distributing 12 product categories for PCE and 5 product categories for measurement instruments. In tandem with its geographical expansion plan, the group plans to increase its product range by acquiring distribution rights for additional products from its existing suppliers through its established relationship. It is also eyeing distribution rights from new suppliers and developing new products under its own brands. Financials Serves the Malaysian market predominantly, in particular Peninsular Malaysia (75% of FY15 revenue) Margins are understandably volatile given cyclical nature of industries it serves, though still commendable at double-digits despite tough operating environment Earnings going forward will be underpinned by valve maintenance jobs, owing to the fact that valve may need to be changed every year Interest savings of RM0.7m Most of Dancomech s revenue is derived from trading of process control equipment (PCE), of which more than 70% is contributed by its primary product, valves. The group serves the Malaysian market predominantly, in particular Peninsular Malaysia (75% of FY15 revenue), while Indonesia accounts for c.20%. Higher domestic sales in FY13 were mainly due to the contribution of a large purchase order from an oil and gas player. FY15 net profit was adversely affected by fluctuation of crude palm oil and crude oil prices meanwhile, resulting in lower demand. Margin compressions. Given the cyclical nature of the industries it serves, margins are understandably volatile, declining from 31.1% in FY13 to 16.4% in FY15. The huge drop in FY14 (Figure 7) was mainly due to i) higher product cost, ii) modification costs, which is not covered by suppliers, and iii) completion of waste water project. To retain market share, the group has had to lower its selling price owing to stiffer competition. Having said that, Dancomech continues to enjoy double-digit margins in a tough operating environment however. Forecast. We anticipate its earnings going forward will be underpinned by valve maintenance jobs, owing to the fact that valve may need to be changed every year. Net margin for FY16 is expected to remain flattish to lower, weighed by i) fewer new projects from the oil and gas industry due to weak oil prices, ii) higher product costs, which is largely denominated in US Dollars, and iii) the one-off listing expenses, amounting to RM3.2m. We expect earnings for FY17 onwards to be spurred by higher demand from the oil and gas industry however, on the assumption of a stronger recovery in crude oil prices. Lower gearing level. The group has allocated RM4.6m from its IPO gross proceeds to partially repay its bank borrowing taken to finance the construction of its office. As a result, its gearing level will reduce from 0.11x to 0.04x, enjoying interest savings of RM0.7m in the process. 4 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 4 of 9
Dividend payout up to 30% of its profit after tax Dividend. The group expects to have a dividend payout up to 30% of its profit after tax (PAT) subject to its cash flow and earnings. We estimate dividend yield for FY16 and FY17 at 2.2% and 3.0% respectively on the back of a 30% dividend payout assumption. Figure 7: Revenue and Net Profit Trend Revenue Net profit Net profit margin (%) 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2012 2013 2014 2015 2016F 2017F 35% 30% 25% 20% 15% 10% 5% 0% Industry Outlook Figure 8: Market Size for PCE and Measurement Instruments 3.0 2.5 2.0 2.2 2.0 2.1 2.2 2.2 2.3 2.4 2.4 2.5 1.5 1.0 0.5 0.0 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Company Prospectus, IMR Report Valuation and Recommendation Fair value of RM0.80 Pegging Dancomech s FY17F EPS of 7.9sen to a 10x PE multiple, we derive a fair value of RM0.80 which implies an upside of 6.4% from its IPO price of RM0.75. Unimech, the only listed peer is trading at a trailing 12-month PE multiple of 14x. A lower multiple is ascribed to Dancomech however, to account for the slower growth in the plantation and oil and gas sectors in near term, its main business areas. Overall, we expect earnings to remain flattish in near term, only underpinned by the valve replacement market and water and sewerage industries. 5 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 5 of 9
Figure 9: Peer Comparison Company Price (RM) @ Market Cap EPS (sen) EPS Growth (%) 8-July (RMm) 2016E 2017E 2016E 2017E Unimech 1.18 151.7 0.1 0.1-9.1 3.8 Company P/E (x) P/B (x) ROE (%) Dividend Yield (%) 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E Unimech 14.8 14.2 0.6 0.5 4.8 4.9 3.0 3.0 Source: PublicInvest Research, Bloomberg SWOT Analysis Figure 10: SWOT Strengths Weaknesses Diverse product range which comprises third party products and own brands, as well as aftersales services Experienced management with about 30 years experience in Process Control Equipment (PCE) and Measurement Instruments industry. Opportunities High dependency on third party suppliers and its OEM manufacturers. Absence of long term contract with customers. Threats Recovery of the palm oil and oil and gas industry Currency fluctuations which affect product costs. Unfavourable crude palm oil and crude oil prices Competition from other players. Source: PublicInvest Research 6 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 6 of 9
IPO Details Public issue of 24,000,000 new shares and an offer for sale of 16,000,000 existing shares at RM0.75 per share Dancomech Holdings Berhad is seeking to list on Bursa Malaysia s Main Market with an enlarged and paid-up share capital of 149,000,000 shares at a 40sen par value each. The IPO is for a total of 40,000,000 shares, comprising a public issue of 24,000,000 new shares and an offer for sale of 16,000,000 existing shares. Its market capitalization upon listing will be RM111,750,000 based on its IPO price of RM0.75 per share. Public issue of 24,000,000 new shares representing approximately 16.1% of its enlarged issued and paid-up share capital will comprise the following: i. A total of 7,500,000 new shares, representing approximately 5.0% of its enlarged issued and paid-up share capital are available to the Malaysian Public. ii. iii. A total of 2,503,000 new shares, representing approximately 1.7% of its enlarged issued and paid-up share capital are allocated to its eligible directors and employees. A total of 13,997,000 new shares, representing approximately 9.4% of its enlarged issued and paid-up share capital are allocated for placement to selected Bumiputera investors approved by MITI The IPO allocation and post-ipo share capital of Dancomech are shown in the following tables. Figure 11: IPO Allocation Categories No. of shares % of enlarged share capital upon listing Institutional offering: Bumiputera investors approved by MITI 18,627,000* 12.5 Selected investors 11,370,000 7.6 Sub-total 29,997,000 20.1 Retail offering: Eligible directors and employees 2,503,000 1.7 Public 7,500,000 5.0 Sub-total 10,003,000 6.7 Total 40,000,000 26.8 * inclusive of 4,630,000 offer shares for placements Figure 12: Utilisation of Proceeds Details of utilisation RM m % Timeframe for Utilisation Upon Listing Purchase of offices cum stores i. Johor Bahru 2.5 13.9 Within 24 months ii. Sabah and Sarawak 4.0 22.2 Within 24 months Repayment of bank borrowing 4.6 25.3 Within 12 months Purchase of equipment 1.0 5.6 Within 12 months Working capital 2.7 15.2 Within 24 months Estimated listing expenses 3.2 17.8 Within 3 months Total 18.0 100 *based on RM0.75 for 24,000,000 new shares issued 7 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 7 of 9
KEY FINANCIAL DATA INCOME STATEMENT DATA FYE Dec (RM m) 2013A 2014A 2015A 2016F 2017F Revenue 83.2 79.0 68.3 69.8 73.1 Gross Profit 29.9 27.5 21.7 22.1 23.3 Operating Profit 31.4 19.6 15.3 10.6 14.5 Finance Costs 0.0-0.2-0.1-0.4-0.4 Pre-tax Profit 31.5 19.6 15.3 11.2 15.8 Income Tax -6.1-5.2-4.1-2.8-3.9 Effective Tax Rate (%) 19% 26% 27% 25% 25% Minorities -0.1-0.1-0.2-0.2-0.2 Net Profit 25.3 14.3 11.0 8.3 11.6 Growth Revenue - -5% -14% 2% 5% Gross Profit - 8% -21% 2% 5% Net Profit - 44% -23% -25% 41% Source: Company, PublicInvestResearch estimates BALANCE SHEET DATA FYE Dec (RM m) 2013A 2014A 2015A 2016F 2017F Property, Plant & Equipment 24.6 25.8 25.3 26.3 29.3 Cash and Cash Equivalents 9.0 12.3 21.7 29.2 27.7 Trade and Other Receivables 30.5 25.5 21.2 21.5 22.7 Other Assets 26.3 31.7 29.9 42.8 44.0 Total Assets 90.4 95.3 98.1 119.8 123.7 Trade and Other Payables 37.2 17.6 14.7 15.1 15.8 Finance Lease 0.4 0.3 0.2 0.1 0.0 Borrowings - 8.6 8.1 7.9 3.0 Other Liabilities 2.9 2.0 1.3 0.8 0.8 Total Liabilities 40.5 28.4 24.4 23.8 19.6 Shareholders Equity 49.9 66.8 73.7 96.0 104.1 Total Equity and Liabilities 90.4 95.3 98.1 119.8 123.7 Source: Company, PublicInvestResearch estimates PER SHARE DATA & RATIOS FYE Dec 2013A 2014A 2015A 2016F 2017F Book Value Per Share 0.3 0.4 0.5 0.6 0.7 NTA Per Share 0.3 0.4 0.5 0.6 0.7 EPS (Sen) 17.1 9.7 7.5 5.7 8.0 DPS (Sen) - - - - - Payout Ratio - - - - - ROA 28% 15% 11% 7% 10% ROE 51% 25% 16% 11% 12% Source: Company, PublicInvestResearch estimates 8 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 8 of 9
RATING CLASSIFICATION STOCKS OUTPERFORM NEUTRAL UNDERPERFORM TRADING BUY TRADING SELL NOT RATED The stock return is expected to exceed a relevant benchmark s total of 10% or higher over the next 12months. The stock return is expected to be within +/- 10% of a relevant benchmark s return over the next 12 months. The stock return is expected to be below a relevant benchmark s return by -10% over the next 12 months. The stock return is expected to exceed a relevant benchmark s return by 5% or higher over the next 3 months but the underlying fundamentals are not strong enough to warrant an Outperform call. The stock return is expected to be below a relevant benchmark s return by -5% or more over the next 3 months. The stock is not within regular research coverage. SECTOR OVERWEIGHT NEUTRAL UNDERWEIGHT The sector is expected to outperform a relevant benchmark over the next 12 months. The sector is expected to perform in line with a relevant benchmark over the next 12 months. The sector is expected to underperform a relevant benchmark over the next 12 months. DISCLAIMER This document has been prepared solely for information and private circulation only. It is for distribution under such circumstances as may be permitted by applicable law. The information contained herein is prepared from data and sources believed to be reliable at the time of issue of this document. The views/opinions expressed herein are subject to change without notice and solely reflects the personal views of the analyst(s) acting in his/her capacity as employee of Public Investment Bank Berhad ( PIVB ). PIVB does not make any guarantee, representations or warranty neither expressed or implied nor accepts any responsibility or liability as to its fairness liability adequacy, completeness or correctness of any such information and opinion contained herein. No reliance upon such statement or usage by the addressee/anyone shall give rise to any claim/liability for loss of damage against PIVB, Public Bank Berhad, its affiliates and related companies, directors, officers, connected persons/employees, associates or agents. This document is not and should not be construed or considered as an offer, recommendation, invitation or a solicitation of an offer to purchase or subscribe or sell any securities, related investments or financial instruments. Any recommendation in this document does not have regards to the specific investment objectives, financial situation, risk profile and particular needs of any specific persons who receive it. We encourage the addressee of this document to independently evaluate the merits of the information contained herein, consider their own investment objectives, financial situation, particular needs, risks and legal profiles, seek the advice of their, amongst others, tax, accounting, legal, business professionals and financial advisers before participating in any transaction in respect of any of the securities of the company(ies) covered in this document. PIVB, Public Bank Berhad, our affiliates and related companies, directors, officers, connected persons/employees, associates or agents may own or have positions in the securities of the company(ies) covered in this document or any securities related thereto and may from time to time add or dispose of, or may be materially interested in, any such securities. Further PIVB, Public Bank Berhad, our affiliates and related companies, associates or agents do and/or seek to do business with the company(ies) covered in this document and may from time to time act as market maker or have assumed an underwriting commitment in the securities of such company(ies), may sell them or buy them from customers on a principal basis, may have or intend to accommodate credit facilities or other banking services and may also perform or seek to perform investment banking, advisory or underwriting services for or relating to such company(ies) as well as solicit such investment advisory or other services from any entity mentioned in this document. The analyst(s) and associate analyst(s) principally responsible for the preparation of this document may participate in the solicitation of businesses described aforesaid and would receive compensation based upon various factors, including the quality of research, investor client feedback, stock pickings and performance of his/her recommendation and competitive factors. Hence, the addressee or any persons reviewing this document should be aware of the foregoing, amongst others, may give rise to real or potential conflicts of interest. Published and printed by: PUBLIC INVESTMENT BANK BERHAD (20027-W) 9 th Floor, Bangunan Public Bank 6, Jalan Sultan Sulaiman 50000 Kuala Lumpur T 603 2268 3015 F 603 2268 3014 Dealing Line 603 2268 3129 9 Important disclaimer is provided at the end of this report. PUBLIC INVESTMENT BANK Page 9 of 9