Dutech Holdings Limited - CIMB Research 2016-12-05: Upbeat growth trajectory

Dutech Holdings Limited - CIMB Research 2016-12-05: Upbeat growth trajectory DUTECH HOLDINGS LIMITED CZ4.SI

Dutech Holdings Limited - Upbeat growth trajectory

  • Asia’s largest safe manufacturer; reputable global customers.
  • Upbeat sales outlook in FY17-18F driven by positive business developments.
  • Strong balance sheet; maintain Add with CY17 DCF-based target price of S$0.65.
  • Dutech is one of our Singapore top picks.

Asia’s largest safe manufacturer

  • As Asia’s largest safe manufacturer, Dutech fulfills over 50% of the safe demand from Diebold and Wincor Nixdorf, the world’s second- and third-largest ATM manufacturers, which collectively command 30-40% of the global ATM market.
  • Dutech is also a key ODM manufacturer for Winchester and Liberty, two leading US weapon safe brands. In 2014, Dutech secured Scientific Games, a top global gaming machine supplier, as its key customer for its intelligent terminal business.

Staying ahead of competition through continued R&D 

  • Dutech continues to sharpen its competitive edge in the high-end global safe market via continued 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 is one of the few Asian safe makers today with UL and CEN certificates. These certificates are often considered key criteria in global customers’ selection of suppliers and set Dutech apart from other China safe makers, which are usually focused on the lower-end local market.

Positive business developments to drive growth ahead

  • We project upbeat sales outlook for Dutech in FY17-18F, driven by: 
    1. potential new contracts from Wincor and Diebold post their merger, 
    2. the manufacturing contract for a new transmission product from a leading automotive player, and 
    3. the recently completed acquisition of METRIC Mobility Solutions AG, a Frankfurt-listed intelligent terminal maker/payment solution provider.
  • We note that while #1 above should be immediately earnings-accretive, it might take 1-3 years for the group to see meaningful bottomline contribution from #2 and #3 considering the development cycle for the new transmission product and the time and effort needed to streamline METRIC operations. 
  • We recommend investors to remain patient and stay invested while management strives to turn METRIC around.

Margin normalisation ahead is well expected

  • Dutech has been a key beneficiary of the weakening Rmb (c.80-90% of its FY15 sales from its China plants were denominated in US$ but costs are mainly in Rmb) and low steel prices (steel formed c.40-50% of group cost of sales). As a result, group GPM rose 1.7% pts to 31.6% in 9M16 (9M15: 29.9%).
  • We project lower GPM for Dutech in FY17F/18F at 28.4%/28.3% vs. FY16F’s 30.3% to reflect the recent rebound in steel price. We expect the continued weakening Rmb to mitigate margin pressure from the higher steel prices.

Formidable balance sheet

  • Dutech had Rmb212m net cash as at end-3Q16. We note that most of Dutech’s cash position is held in US$, enabling it to reduce its exposure to the weakening Rmb and act on potential acquisitions promptly should opportunities arise.

Maintain Add, with CY17 DCF-based target price of S$0.65 

  • Dutech currently trades at FY16/17F core P/E of 7.7x/6.6x vs. peers/downstream players’ average of 17.3x/14.4x. 
  • Key re-rating 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/ 2016-12-05
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.650 Same 0.650