DUTECH HOLDINGS LIMITED
CZ4.SI
Dutech Holdings Limited - A stellar FY16 on the horizon
- 1H16 core net profit ahead of our expectation at 44% of our full-year forecast (1H at 34-35% in FY14-15; 3Q seasonally stronger with c.50% contribution).
- Core net profit rose 46% yoy to Rmb28m in 2Q16, benefiting from Rmb weakness against US$, lower steel price as well as the fresh contribution from Krauth.
- We expect record-high core net profit in FY16 and Dutech's future growth to be driven by new orders from existing customers and potential M&As.
- Maintain Add, with our CY16F DCF-based target price unchanged at S$0.61.
Strong 2Q16 profit driven by sales growth and margin expansion
- Group core net profit rose 46% yoy to Rmb28.4m in 2Q16 (US$4.3m; 2Q15: Rmb19.4m) with revenue growth of 18% yoy to Rmb321m (US$48.3m; 2Q15: Rmb273m).
- GPM of high security segment (i.e. safes, gaming terminals) rose 0.6% pts yoy to 32.9% in 2Q16 (2Q15: 32.3%), due to strong US$ against Rmb and lower steel cost.
- GPM of business solution segment rose 3.7% pts to 21.4% in 2Q16 (2Q15: 17.7%) due to higher GPM for Krauth (acquired in Jan 16).
- Overall GPM rose 0.4% pts to 28.4% in 2Q16 (2Q15: 28%).
Formidable balance sheet
- Dutech has a net cash position of Rmb200m (US$30m) as at end-2Q16 (end-FY15: Rmb186m), equivalent to 26% of its current market cap. We note that most of its cash position has been held in US$, enabling Dutech to reduce its exposure to the weakening Rmb, and to capitalise on potential overseas M&As should the opportunity arise.
- Inventory was built up to a record high of Rmb201m at end-2Q16 to support the needs of sales growth, ahead of the anticipated seasonally strong sales in the coming 3Q.
On track for record earnings in FY16
- At 44% of our full-year forecast, Dutech's 1H16 core net profit is already ahead of our projection. 1H formed only 34-35% of group core net profit in FY14-15. Seasonally, 3Q is typically a very strong quarter, and formed c.50% of the group’s yearly profit in FY14- 15.
- Given the favourable impact from Rmb depreciation and the still relatively low inventory cost of steel as at end-2Q16, we are hopeful of an even stronger 3Q this year on top of the seasonality factors.
Growth beyond FY16 to be driven by new orders and M&As
- We understand that Dutech has made positive progress in talks with its key customers Wincor and Diebold, the world’s 2nd and 3rd biggest ATM makers (by market share), for a sizeable new business contract post their merger (according to the duo’s merger plan, the merged entity would be more focused on software and technology, hence more hardware jobs to be outsourced).
- We think Dutech is well poised to benefit from Wincor and Diebold’s outsourcing activities, given its strong track record with both.
Leader in a niche market with an attractive valuation
- We like Dutech for being a leader in the niche safe manufacturing industry (it is the world’s 2nd biggest safe manufacturer after Sweden-listed Gunnebo) and its compelling valuation of 7.4x CY16F P/E and 2.9x CY16F EV/EBITDA vs. its peers and downstream players’ 16.2x P/E and 8.7x EV/EBITDA.
- Our target price of S$0.61 is based on a 20% liquidity discount to CY16F DCF (WACC: 12%).
- Organic and M&A-driven growth is the key potential re-rating catalyst.
- Key risks include fluctuations of FX and steel price.
Roy CHEN CFA
CIMB Research
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William TNG CFA
CIMB Research
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http://research.itradecimb.com/
2016-08-12
CIMB Research
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