• We deem 9M23 core net profit of RM15m in line at 66%/71% of our/Bloomberg consensus’ FY23F, as 4Q tends to be the strongest quarter.

• Trading revenue growth and metal stamping revenue recovery should help Danco to post stronger qoq earnings in 4Q23F, in our view.

• Reiterate Add, with an unchanged TP of RM0.58 (based on 10x FY24F P/E). This note marks the transfer of coverage to Lew Cheng Wei.

9M23 CNP Largely in Line, Robust Net Cash Supports FY23F Dividends

9M23 core EPS of RM15.0m made up 66% of our FY23 forecast (70.5% of Bloomberg consensus), which we deem in line as 4Q tends to be seasonally stronger, historically accounting for 27-47% of full-year core net profit since listing in FY16. 3Q23 core net profit rose 18.5% yoy (+9.6% qoq) to RM5.7m, on the back of improved operating margin, with gross margin improving to 22.3% from 19.6% in 3Q22. No dividend was declared this quarter, as we expected. Danco has a payout policy of 40% of its net profit, which should be easily supported by its net cash position of RM84.8m (19 sen/share) as at 31 Sep 2023 and healthy cash flow generation of c.RM15m-20m p.a.

Trading Segment Revenue Growth to Drive Earnings Growth

3Q23 revenue fell 2.2% yoy (+0.6% qoq) to RM55.2m as metal stamping segment revenue fell 33.0% due to lower demand from the air-conditioning industry. However, higher contributions from the trading segment, which grew by 49.0% yoy due to stronger demand, mainly from palm oil companies, helped to cushion against the decline in metal stamping revenue. 3Q23 EBITDA margin rose 1.7% pts yoy to 16.2% (+2.0% pt qoq) as higher revenue from the trading segment also comes with a higher gross profit margin than the metal stamping segment. We expect Danco to record stronger qoq results in 4Q23F, mainly driven by its trading and E&E engineering segments which should benefit from higher construction activities and seasonal factors (4Q is typically stronger for both divisions). Further, metal stamping revenue, which rose by 6.5% qoq in 3Q23, is expected to continue its recovery in 4Q23F.

Reiterate Add, With An Unchanged TP of RM0.58

We make no changes to our EPS estimates, Add call and TP of RM0.58 (based on 10x FY24F P/E, its 7-year historical mean since listing in 2016). We like Danco for: i) its undemanding valuation, as it is currently trading at 7.4x CY24F P/E (4.0x FY24F ex -cash P/E), vs. its average P/E of 8.0x since listing, with a healthy FY22-25F EPS CAGR of 9.7x and a 7.6% discount to its NTA of 46 sen/share, ii) its attractive dividend yields of 5.4-6.8% for FY23-25F, and iii) the defensive nature of its businesses (diversi fied business segments, especially trading of industrial valves used in many industries). Downside risks: lower sales volume which could negatively impact sales, spike in input cost and price competition which could lead to margin compression. Key rerating catalyst: robust earnings delivery in FY23-25F.

Source: CGS-CIMB Research - 1 Dec 2023