Dutech Holdings Limited - CIMB Research 2016-06-03: A gem in the safe

Dutech Holdings Limited - CIMB Research 2016-06-03: A gem in the safe DUTECH HOLDINGS LIMITED CZ4.SI 

Dutech Holdings Limited - A gem in the safe

  • Asia’s largest safe manufacturer; reputable global customers.
  • Technological edge over peers; proven M&A-driven growth strategy.
  • Upbeat earnings outlook on potential contract wins, soft steel price and weak Rmb. 
  • Initiating coverage at Add with a CY16F DCF-based target price of S$0.61 (WACC: 12%).

Protecting 25% cash around the world

  • As Asia’s largest safe maker, Dutech fulfills over 50% of the safe demand from Diebold and Wincor Nixdorf, the world’s No. 2 and No. 3 ATM makers that together command 30- 40% of the global ATM market. 
  • It is also a key ODM manufacturer for Winchester and Liberty, two reputable US weapon safe brands. 
  • Dutech secured Scientific Games, a top game machine supplier, as a key customer for its intelligent terminal business in 2014.

A high-quality “S-chip” that deserves fair treatment

  • We base our belief in Dutech’s high quality on: 
    1. its global business profile, 
    2. management accumulating its shares, and 
    3. its shipment record. 
  • Dutech has a dividend record (cumulative 8.5 Scts since IPO) as well as a successful M&A track record.

Successful integration of German businesses

  • The acquisitions of the three German firms since 2011 have allowed Dutech to expand not only sales (FY11-15 CAGR: 26%) but also technology. In particular, the acquisition of its loss-making competitor Format in 2011 (turned around in 2014) has enabled it to expand its customer base and DTMT’s electromechanical expertise has enabled it to broaden its product reach and to provide higher value-added services to its customers.

Staying ahead of competition through continued R&D

  • Dutech continues to sharpen its competitive edge in the high-end global safe market via investment in R&D. R&D expenses formed 2.3% of group sales (34% of core net profit) in FY11-15. 
  • Thanks to its R&D efforts, Dutech was the pioneer and remains one of the few Asian safe makers today with UL and CEN certificates. These certificates are often considered key criteria in Western customers’ selection of suppliers and set Dutech apart from its China peers, which are usually focused on the lower-end local market.

Upbeat earnings growth outlook

  • We forecast 11-16% core EPS growth in FY16-18F on potential contract wins (Dutech has made positive progress in talks with Wincor and Diebold for a sizeable new contract, which we expect to flow in from FY17 onwards) and the overall bright GPM outlook underpinned by low steel price (steel formed c.40-50% of FY15 group cost of sales) and favourable FX impact from the weakening Rmb (c.80-90% of FY15 sales from its China plants were denominated in US$ but costs were mainly denominated in Rmb).

Very compelling valuation; initiate coverage with Add

  • Dutech now trades at a CY16F/17F P/E of 6.4x/5.5x and EV/EBITDA of 2.3x/1.8x only. 
  • Our target price of S$0.61 (based on a 20% liquidity discount to CY16F DCF) is, in our view, conservative, implying a CY16F/17F P/E of 9.9x/8.5x, vs. its peer and customers’ average of 16.2x/12.7x despite its strong net cash position (30% of market cap). 
  • Key catalysts include organic earnings growth, potential M&As and further Rmb weakening. 
  • Key risks include customer concentration, increased competition and FX fluctuations.

Roy CHENCFA CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-06-03
CIMB Securities SGX Stock Analyst Report ADD Initiate ADD 0.61 Same 0.61