Dutech Holdings Limited - CIMB Research 2017-05-11: Near-term Gestation Pains

DUTECH HOLDINGS LIMITED CZ4.SI

Dutech Holdings Limited - Near-term gestation pains

1Q17 core net profit missed our expectations, at 11% of our full-year forecast.
Core net profit declined 42% yoy in 1Q17, due mainly to compressed GPM from higher steel prices, as well as consolidation of the loss-making Metric Group.
Balance sheet remained strong, with Rmb141m net cash as at end-1Q17.

We cut FY17-19F core EPS by 6-13%. We expect a stronger 2H17 with the recent retreat in steel prices and Dutech taking steps to improve the profitability of Metric.
Maintain Hold, with slightly lower CY17 DCF-based target price of S$0.53.

At 11% of our full-year forecast, 1Q17 core net profit was below our expectations, even if we take into consideration the weak seasonality (1Q16 formed 17% of FY16 core net profit).
Core net profit fell 42% yoy to Rmb10m in 1Q17 (1Q16: Rmb17.1m) due mainly to the lower GPM of the high security segment, and the still loss-making position of the Metric Group (acquired in 4Q16).
Group revenue surged 32% yoy due mainly to the consolidation of Metric. Excluding the Metric contribution, group revenue rose 3.2% yoy.

High security segment saw a severe GPM compression of 9.4% pts yoy to 26.7% in 1Q17, due to the sharply rising steel price during 2016. As a result, the gross profit of the high security segment fell 24% yoy to Rmb43m in 1Q17 (1Q16: Rmb56m) despite a 3% growth in revenue.
We expect an improving margin outlook for the high security segment for the rest of FY17, given that steel prices have retreated from c.Rmb3.8k per metric tonne at end-FY16 (a 3-year high) to c.Rmb3k as of today.

Its Rmb77m revenue contribution aside, Metric (acquired in 4Q16) remained a drag on group profitability in 1Q17 due to its significant overhead expenses of Rmb17.3m during the quarter. We understand that management is taking steps to streamline and integrate Metric into the rest of the group.
Besides cost rationalistion, the group is tapping on Metric’s technical expertise and business network to expand the self-service terminal segment. We expect Dutech to take 1-2 years to turn around Metric.

Group balance sheet remained strong, with Rmb141m net cash as at end-1Q17 (endFY16: Rmb171m), forming 16% of its market cap. The slight decrease in net cash vs end-FY16 was due mainly to the group stocking up inventory to mitigate the impact of steel price rise and to meet the needs for sales growth.
Dutech maintained its interim dividend of 1Sct per share in 1Q17 (dividend is typically declared with 1Q results only).

We cut FY17-19F core EPS by 6-13% to reflect the weaker-than-expect 1Q17 core net profit as well as to adjust our expected pace for Dutech to turn Metric around.
Our forecast 21% yoy decline in FY17F core net profit is due to the high cost inventory at the start of the year and the initial losses from the consolidation of Metric.
We expect a stronger 2H17 driven by the recent retreat in steel prices, and further profit recovery in FY18-19F on the back of improving profitability at Metric.

We maintain our Hold call on Dutech with a slightly lower target price of S$0.53 based on FY17F DCF (WACC: 12%).
Faster-than-expected turnaround of Metric could be a positive surprise.
Key risks include unfavourable fluctuation of steel price.

Roy CHEN CFA CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-05-11

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.53 Down 0.550