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

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.

FY16 core net profit in line, rising 8% yoy 

  • 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).

Metric Group contributing net loss in 4Q16 

  • 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.

Rising steel price weighs on high security segment GPM outlook 

  • 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%).

Cut FY17-18F core EPS by 24% 

  • 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.

Downgrade Dutech to Hold on subdued FY17 earnings outlook 

  • 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%.

Waiting for synergy to be unlocked from Metric 

  • 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