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Jom & Terry

Author: jomnterry   |   Latest post: Tue, 1 Dec 2020, 11:36 AM

 

DANCOMECH HOLDINGS BERHAD (5276) - SERVING TOPGLOV & HARTA, ON TOP OF...

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DANCOMECH

 

SERVING THE GLOVE BIG BOYS,

PROCESS CONTROL EQUIPMENT DISTRIBUTION,

SINGAPORE JURONG PORT SUBCONTRACT,

PLUS

METAL FABRICATION PROFITABLE VENTURE

 

EXISTING BUSINESS - CONTROL EQUIPMENT DISTRIBUTION

DANCO trades and distributes process control equipment and measurement instruments for glove, palm oil, oleochemical, construction, and various engineering industries.

 

LATEST UPDATE: SERVING GLOVE COMPANIES, INCLUDING HARTA & TOPGLOV

DANCO's valves and industrial products are sold to glove industries, including TOPGLOV and HARTA. Demand went up a lot. DANCO's products generate recurring incomes as customers like TOPGLOV and HARTA require maintenance all the time, here and there. This makes sense because if glove companies delay their maintenance, larger-scale production line shutdowns would cost them more.
 
 
RECURRING INCOMES SUPPORTED BY COMPLEMENTING INDUSTRIES
 
DANCO's products are supplied to various industries, including glove, palm oil, oleochemical, construction, and various engineering industries.
 
Similarly, all their customers need to maintain their valves and industrial products from time to time, here and there. If their delay their maintenance, larger-scale production line shutdowns would cost them more.
 
Each sector complements each other at different times, giving DANCO sustainable recurring income streams throughout the year.
 
 

RM36.5 million SUBCONTRACT AT SINGAPORE JURONG PORT

On Sep 7, DANCO bagged a sub-contract worth S$12.01 million (RM36.5 million) at Jurong Port in Singapore. According to DANCO management, the subcontract:

  • Which includes the design and supply of material handling equipment, will be completed by January 2022
  • Is expected to contribute positively to its earnings and net assets in the upcoming quarters

 

NEW & PROFITABLE BUSINESS - METAL FABRICATION

On Aug 3, DANCO acquired 70% of MTL Engineering and started its profitable venture into metal fabrication (What UWC and NOTION is involved in), metal stamping, tool and die making.

According to DANCO management, MTL Engineering:

  • Will start contributing to DANCO's earnings in coming quarters. MTL Engineering has been consistently profitable in the past 3 years. 
  • Gives DANCO the opportunity to move into new business areas such as air conditioning, automotive and furniture component businesses and enables some cross-selling of products between both groups

 

RESILIENT BUSINESS, UNAFFECTED BY MCO

Interestingly, DANCO’s revenue and earnings are not impacted by MCO. Their existing business, trading and distribution of process control equipment are required by their clients all the time, regardless of economic cycle.

“We can still hope to grow even in the current slowdown because we are involved in many industries, not just a few,” Tang tells StarBizWeek.

 

NET-CASH RM40 million, READY TO SEIZE OPPORTUNITIES

With RM40mil in net cash, chief financial officer Tang Yuen Kin says the company, which trades and distributes process control equipment and measurement instruments for various industries will evaluate opportunities that it feels can add value to the company.

 

DECENT FUNDAMENTALS

  • DANCO has achieved growing revenues since 2016. While earnings fluctuate minimally, they are on an upward trajectory.
  • DANCO is a net cash company with RM40 million cash to seize growth opportunities.
  • DANCO has a decent ROE of 9.88%. DANCO is good at generating returns using shareholder equities.
  • DANCO has a strong current ratio of 8x. It has zero issues meeting short (and long) term financial obligations.

 

BUSINESS RISKS

DANCO’s process control equipment trading and distribution business could be impacted by unforeseen black swan events. DANCO’s metal fabrication business could underperform. DANCO’s Jurong Port subcontract may not be completed as targeted.

 

VALUATION

Based on our guesstimates and calculation, DANCO stands a chance to achieve around RM20 million earnings in the next 4 four quarters.

Earnings Contributed by:

  • Business #1: Trading & Distribution of Process Control Equipment RM15.0 million (Assuming same earnings as FY2019)
     
  • Business #2: Singapore Jurong Port Subcontract = RM3.5 million
    (Contract size RM36.5 million, assuming 12% net profit margin, subsdiary 55% owned by DANCO)
     
  • Business #3: MTL Engineering = RM2.4 million
    (Assuming same earnings as FY2019, 70% owned by DANCO)
     
  • Estimated total earnings in the next fourters
    = RM (15.0 + 3.5 + 2.4)
    = RM 20.9 million
    = Around RM 20 million

An annual earnings of RM20 million would give DANCO an EPS of 6.58sen.

At current share price of RM0.615, DANCO is being traded at a forward 1-year PER of only 9.35x.

  • At a 1-year forward PER of 10 times, DANCO’s share price is worth RM0.66.
  • At a 1-year forward PER of 12 times, DANCO’s share price is worth RM0.79.
  • At a 1-year forward PER of 15 times, DANCO’s share price is worth RM0.99.

DANCO, who is partly involved in the metal fabrication business, is being traded at a PER of 14 times.

On the other hand, NOTION and UWC, who are largely/wholly involved in metal fabrication business, is being traded at PERs of 47 and 63 times, respectively.

How would Mr. Market value DANCO?

Let’s let Mr. Market decide.

 

TECHNICAL OBSERVATION: 2x BREAKOUT COMBO, THEN RETRACED & CLOSED 12% ABOVE OPEN PRICE.

 

On October 12, DANCO had a technical breakout from its RM0.55 resistance. Then, it surged and had another breakout from its RM0.635 resistance. 

Since then, DANCO has stood above 62 sen. As of October, DANCO is standing at 63 sen.

Going forward, how would DANCO’s share price move?

Let's let Mr. Market decide.

 

DISCLAIMER

Our study notes are for sharing purpose only. We could be inaccurate. There is no buy/sell recommendation.

 

http://t.me/jomnterry

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