Dutech Holdings Limited - CIMB Research 2017-03-02: 4Q16 Waiting for synergy to be unlocked

DUTECH HOLDINGS LIMITED CZ4.SI

Dutech Holdings Limited - 4Q16 Waiting for synergy to be unlocked

FY16 core net profit in line with our expectations; it rose 8% yoy due mainly to the strong first 9M, which benefited from favourable FX and benign steel cost.
However, core net profit fell 41.5% yoy in the 4Q due to the negative contribution from the newly acquired Metric Group.
GPM of high security segment fell 4.4% pts yoy in 4Q16 due to higher steel price.

We cut FY17-18F core EPS by 24% to reflect 1) the near-term drag from the loss-making Metric, and 2) the anticipated lower GPM for the high security segment.
We downgrade Dutech to Hold, with a lower target price of S$0.55.

Dutech’s FY16 core net profit was in line with our expectations at 98% of our forecast. It rose 8% yoy to Rmb102.1m (FY15: Rmb94.6m).
Group revenue rose 16.5% yoy to Rmb1.39bn in FY16 (FY15: Rmb1.19bn), led by higher sales in the high security segment (+Rmb25m yoy due to sales growth in ATM safes) and the business solutions segment (+Rmb178m yoy due to fresh contribution from Krauth and the Metric Group).

Despite the decent full-year core net profit growth, we note that the growth can be mainly attributable to the strong first 9 months (forming 93% of full-year core net profit).
In the 4Q, group core net profit saw a 41.5% yoy decline to Rmb7.5m (4Q15: Rmb12.9m) as the Metric Group (acquired in Oct 16) contributed negatively (core net loss of c.Rmb5m based on our back-of-the-envelope estimate). We expect Metric to remain a drag on group profitability in FY17.

We expect Dutech to be a key loser in a rising steel price environment.
Over the past one year, China domestic hot rolled steel price rebounded from the 10-year low of Rmb2,000 per metric tonne to Rmb3,800 as of today; this is significantly higher than our previous projection of an average Rmb2,600 per metric tonne for FY17-18F.
4Q16 has seen the negative impact of elevated steel price, with GPM for the high security segment (safe manufacturing business) falling 4.4% pts yoy (4Q16: 23.7% vs. 4Q15: 28.1%).

We cut our FY17-18 EPS forecasts by 24% to reflect 1) the near-term drag of Metric on group profitability, and 2) the anticipated lower high security segment GPM due to the elevated steel price. After the cuts, we are now looking at a 9.3% yoy drop in core EPS in FY17 vs. our previously forecast growth.
We expect core EPS to resume growth in FY18F, after the group fully consolidates Metric and when steel price stabilises.

In line with our core EPS cuts, we downgrade Dutech from Add to Hold and lower our FY17 DCF-based target price to S$0.55 (WACC: 12%).
Dutech currently trades at 9.7x FY17F core P/E, a slight discount to its close peer and the market leader Gunnebo’s 10.9x. Dutech’s FY17F dividend yield of 2% is lower than Gunnebo’s 3.2%.

Management is focused on streamlining Metric’s operations to unlock its synergy with Dutech’s existing businesses. We expect it to take 1-2 years for Dutech to turn around Metric.
Potential improvement in profitability and the eventual turnaround of Metric are key re-rating catalysts. A further increase in steel prices is a key risk.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-03-02

CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 0.55 Down 0.650