Dyna-Mac Holdings - OCBC Investment 2016-08-17: Ceasing coverage

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DYNA-MAC HOLDINGS LTD. NO4.SI

Dyna-Mac Holdings - Ceasing coverage

• Net order book S$38m
• In net cash position
• Dimming earnings visibility.

S$6.4m net profit in 2Q16 

• Dyna-Mac Holdings reported a 6.6% YoY fall in revenue to S$34.1m and a S$6.4m net profit in 2Q16, such that 1H16 saw net profit of S$1.3m vs. our full year forecast of S$3.8m net loss; results were within expectations. 
• Gross profit margin for 2Q16 was unusually high at 42.1% due to recognition of certain variation orders (VO) finally approved by the customers as the projects were nearing completion whilst the costs of such VOs have been recognized in prior periods when these were committed.

S$50m note maturing in Aug 2017 

• Recall that the group issued S$50m of 4.25% notes on 1 Aug 2014 which will mature in Aug 2017. This was part of its S$300m MTN programme that was announced in Jul 2014. The group has not issued any more notes ever since. 
• Considering that Dyna-Mac 
  1. had S$121.5m of cash and cash equivalents (unrestricted) and S$35m of bank debt as of 2Q16, and 
  2. it has few projects left on hand, such that the need for working capital is likely to decrease going forward, 
• it is likely that the group would be able to satisfy this S$50m obligation, barring unforeseen circumstances such as payment difficulties from customers.

Running out of work 

• Given minimal new orders so far, Dyna-Mac's net order book is now only about S$38m, which is close to the amount of revenue recognised in 2Q16. As such, the group is seeking ways to diversify its product and service base and also embarking on rightsizing of operations. 
• Should the group be unable to secure significant new orders by the end of this year, earnings should start to drop off quite significantly in 4Q16. 
• Still, the group is in net cash position, given prudent management. However, the broader operating environment remains tough, and with a lack of earnings visibility for the company and an internal reallocation of resources, we CEASE COVERAGE on Dyna-Mac Holdings.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2016-08-17

OCBC Investment SGX Stock Analyst Report CEASE Maintain HOLD 0.140 Same 0.140