Dutech Holdings Limited - CIMB Research 2016-11-16: On an upbeat growth trajectory

SGinvestors.io

DUTECH HOLDINGS LIMITED CZ4.SI

Dutech Holdings Limited - On an upbeat growth trajectory

• 9M16 core net profit in line, at 90% of our full-year forecast; 4Q seasonally weaker.
• Sales rose 3.5% yoy in 3Q16; core net profit rose 1.2% yoy; group GPM increased 0.7% pts yoy due to Rmb depreciation vs. US$ and moderate steel prices.
• We expect continued sales and profit growth in FY17-18F, driven by the recent acquisitions and new contract wins from existing and new customers.
• Balance sheet remained strong, with Rmb212m net cash as at end-3Q16.
• Maintain Add with higher S$0.65 TP, after rolling over to CY17 DCF (WACC: 12%).

9M16 results in line 

• Dutech’s 9M16 core net profit was in line with our expectations, at 90% of our full-year forecast (4Q seasonally weaker). 
• Group revenue rose 3.5% yoy to Rmb356m in 3Q16 (3Q15: Rmb344m), led by higher sales in the business solutions segment (+Rmb106.3m or +42.6% yoy), partly offset by lower contribution from the high security segment (- Rmb24.1m or -3.9% yoy) due to slower sales of ATM safes. 
• Group core net profit rose 1.2% yoy to Rmb49.1m in 3Q16 (3Q15: Rmb48.5m).

Upbeat GPM in 3Q16; normalisation ahead well expected 

• GPM of the high security segment rose 1.4% pts yoy to 37.6% (3Q15: 36.2%) due to the favourable FX impact from the weakened Rmb against US$ and the still moderate steel price during the quarter. 
• GPM of the business solutions segment rose 1.6% pts to 27.8% in 3Q16 (3Q15: 26.2%) due mainly to the change in product mix. The GPM pressure from the recent rebound in steel prices has been duly reflected in our lower GPM projections for FY17F/18F, at 28.4%/28.3% respectively, vs. 30.3% for FY16F.

Formidable balance sheet 

• Dutech has a strong balance sheet, with Rmb212m net cash as at end-3Q16 (end-FY15: Rmb186m). 
• We note that most of Dutech’s cash position is held in US$, enabling it to reduce its exposure to the weakening Rmb, and to act on potential acquisition opportunities promptly when opportunities arise. 
• On a positive note, Dutech’s inventory rose to a historical high of Rmb241m as at end-3Q16 (4Q15: Rmb152m). Management said the inventory build-up was to support the group’s sales growth going forward.

Positive business developments to drive growth 

• We expect upbeat sales outlook for Dutech in FY17-18F, driven by 
  1. potential new contracts from Wincor and Diebold post their merger, 
  2. recent acquisition of METRIC and 
  3. a manufacturing contract for a new product from a leading automotive player. 
• We note that, while 1) should be immediately earnings-accretive, it might take 1-3 years for Dutech to see meaningful bottomline contribution from 2) and 3), considering time and effort needed to streamline METRIC, and the development cycle for the new product.

Maintain Add with higher target price of S$0.65 

• We like Dutech for its leadership position in the niche safe manufacturing sector (Dutech is Asia’s largest safe maker with c.20-25% share of global ATM safe market) and its ongoing developments (M&As, new contract wins). 
• Dutech currently trades at FY16/17F core P/E of 7.9x/6.8x vs. peers/downstream players’ average of 17.3x/14.4x. 
• Key rerating catalysts include 
  1. organic growth of existing businesses and 
  2. potential synergies from new acquisitions. 
• Fluctuations in FX and steel prices are key risks.

Roy CHEN CFA CIMB Research | Willam TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-11-16

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.65 Up 0.610