This article first appeared in The Edge Malaysia Weekly, on July 18 - 24, 2016.

AT its initial public offering (IPO) price of 75 sen, Dancomech Holdings Bhd will have a market capitalisation of RM111.75 million and trade at 10.18 times FY2015 earnings upon its Main Market debut on July 21, more than two decades after its inception.

Armed with net proceeds of RM14.8 million (gross proceeds: RM18 million) from the sale of 16.11% of its enlarged share base, it is looking to pare its borrowings and gain new clients, especially from the water treatment sector. The trader and distributor of process control equipment (PCE) and measurement instrument plans to do this by increasing its product range post-IPO, through both the acquisition of third-party distribution rights as well as developing and selling its own branded products made by original equipment manufacturers in China and Taiwan.

Currently, more than 50% of its revenue comes from clients from the palm oil and oleochemicals industries, which are facing challenges such as lower selling prices. The same applies to its oil and gas and petrochemical clients, which accounted for 14% to 27% of its revenue between 2012 and 2015.

Dancomech has seven exclusive distributorship rights and 11 other distributorship rights that cover 12 PCE and five measurement instrument product categories. A large portion of its revenue is derived from PCE, with 70% from the sale of valves. Some 80% of its revenue comes from the local market while Indonesia accounts for about 20% of its sales.

The company plans to expand its reach in Sabah and Sarawak by setting up stores-cum-offices in Lahad Datu and Bintulu within 24 months of its listing. It has yet to identify suitable locations there to execute its plan. It currently has a network of distributors in the two states that contributes consistently to its revenue. In FY2015, RM2.59 million of its sales came from Sabah and Sarawak.

According to Dancomech’s prospectus, RM6.5 million of its IPO proceeds are earmarked for spending on office and store expansion in Sabah, Sarawak and Johor Baru; RM4.6 million will be used to reduce its borrowings from Public Bank Bhd, which were used to finance the construction of its headquarters in Shah Alam, Selangor; and RM1 million will be allocated to the purchase of new equipment. This leaves RM2.7 million for working capital, after deducting RM3.2 million for listing expenses. Its gearing will fall to 0.04 times from 0.11 times, saving the company RM710,000 in interest expense.

The IPO promoters are led by the company’s co-founder and managing director Aik Swee Tong. They collectively raised RM12 million of gross proceeds by offering for sale 16 million shares or 10.74% of the enlarged share base, which means that their collective stake will be reduced to 73.15% post-IPO. The promoters are subject to a six-month moratorium.

For the financial year ended Dec 31, 2015, Dancomech’s net profit fell 23.1% year on year to RM11 million and revenue decreased 13.5% to RM68.3 million.

Going forward, PublicInvest Research expects the company’s earnings to be underpinned by valve maintenance jobs as valves may need to be changed every year.

“The net margin for FY2016 is expected to remain flattish to lower, weighed [down] by fewer new projects from the oil and gas industry due to weak oil prices, higher product costs, which is largely denominated in US dollars, and the one-off listing expenses amounting to RM3.2 million. However, we expect earnings for FY2017 onwards to be spurred by higher demand from the oil and gas industry, on the assumption of a stronger recovery in crude oil prices,” it says in a July 11 note.

PublicInvest values Dancomech at 80 sen apiece — implying an upside of 6.4% from its IPO price — based on 10 times its estimated FY2017 earnings per share of 7.9 sen. This is a discount to the 14 times trailing earnings multiple of Unimech Group Bhd (which has a slightly larger market capitalisation of RM140 million) owing to the challenging environment faced by Dancomech’s main business clients, says the research house.

It estimates that Dancomech will have a dividend yield of 2.2% and 3% for FY2016 and FY2017 respectively, based on the company’s intention to pay 30% of its earnings as dividends, subject to its cash flow and earnings. 

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