Humblepie188

Dancomech Holdings Berhad – Betting on the Upcoming Free Warrants !

livingston
Publish date: Wed, 10 May 2017, 11:29 PM
Sharing of Investment Ideas

Co- Written By: Kar Jun & Humblepie

1.Company Profile:

It is a Malaysia-based company that was incorporated in Malaysia on 17 June 2013 as a public limited company lead by both its managing director Daniel Aik Swee Tong and executive director Johnson Aik Cwo Shing who have made it debuts in Bursa Malaysia in 2016.

2. Principal Activities of the Company:

The Group is engaged in the business of trading and distribution of process control equipment and measurement equipment such as valves, switches, actuators, bursting discs, float, gauges, recorders, pressure transmitters and so forth. Its products are either sourced from third party suppliers or original equipment manufacturers (OEM).

Pricing Analysis:

a)      Growth Potential:

In January 2017, Dancomech announced that it ventures into the business of pumps manufacturing. The Group paid RM4.25mil to have its own pumps business along with a factory that produces the pumps via acquiring Chun Khong Engineering Works Sdn Bhd, a company which owns a 99-year leasehold industrial land with single-storey industrial buildings in Perak. The earnings are expected to grow as this acquisition is immediately earnings accretive. The pumps business is largely controlled by two main players and the Group is now buying one of them, hence instantly making them a pump player. Also, the pumping business in Malaysia has a market size of approximately RM30 mil to RM40 mil per annum which the Group is anticipating to record 20% from the market or RM6-8 mil of the new business in 2017. Thereby, the group can record a further 10-20% of the market yearly.

Source from: http://www.thestar.com.my/business/business-news/2017/01/09/dancomech-ventures-into-valve-manufacturing/

b)         Financial Health Analysis:

i.     Income Statement:

                          i.      Net Profit Margin = 29.34%, - Very Good

 

                        ii.      Interest Coverage = 4,908 / 2 = 2,454x – Very Good !

 

                            iii.            Profit for the past 5 years= Not available, but by comparing 2 years’ revenue growth, it shows -12.09% year-to-year.

 

 

c)            Balance Sheet:

                          i.   Current Ratio = 4.87, Healthy!

                        ii.   Debts to Equity Ratio= 0.21, Healthy!

                      iii.   Trade and other receivable= declined slightly (Positive Note)

                      iv.   Bank borrowings= Declined (Positive Note)


 

 

d)           Cash Flow:

                       i.      Positive at least 1 year – Positive cash flow (Pass); Increased partly due to the net proceeds from issuance of shares

 

Therefore, Dancomech passed all my financial health ratios except for the revenue growth as only 4 quarters result are available.

e)            Pricing Analysis:

i.        Price to Book Value= 2.18 (high but acceptable as the company is growing)

ii.      Dividend Yield= 1.01% (for a company in high expansion mode, any dividends payout is a bonus).

 Dancomech has a 30% dividend payout policy.

iii.     PE Ratio = 17.29, high pricing as at 13/03/2017

iv.     Forecast future pricing by taking the average of 4 quarters and multiply on its growth rate as mentioned in the below:

Forecast Future Price= PE ratio divided by EPS * Growth rate

Averaged EPS (2.20+3.5+1.8+2.4) * 15% growth rate = 11.385 sen

P/E Ratio

Forecasted Price

X14

RM1.59

X15

RM1.70

X16

RM1.82

X17

RM1.93

 

 

v.    What is the main catalyst that driving the company to score such earnings?

The Group is expected to add an additional gross profit of RM1.8mil to RM2.4mil that derived from 30% typical margins of RM6-8mil of the new pumping business venturing for 2017. The Group aims to have a revenue growth of 5-10% at least for Indonesia this year. With a strong net cash position of RM44.9mil as at Sept 30 coupled with an annual operating cashflow of RM12-17mil, this allows management the flexibility to meet its annual capex requirement of RM3-4mil while maintaining a consistent dividend payout of 30%.

The Group is eyeing to register its growth of about 15% this year.

 

 

 

 

 

4. Conclusion & Personal Opinion:

The 2 main catalysts of 2017 for the Group have identified by the management which are 1) venturing into pumping business thereby selling it to local and Indonesia market where it aims to capture 5-10% revenue growth this year; 2) Catering potential customers from oil and gas players in Johor (Peninsular Malaysia) for RAPID project and, Lahad Datu and Bintulu (East Malaysia) by setting up distribution hub that is proximity to the key areas.

 

Warrants will be given for free on 18 May with the exercise price of RM0.30. Without the info of Implied Volatility, Effective Gearing and Delta, I am not able to calculate the Fair Value for the warrants. But looking at the current situation, the first trading should be able to hit limit up for the warrants follow by the next day trading range of 40 cents plus minus. The assumption for FV can’t be determined clearly as information is incomplete. For the shareholders, maybe you can look forward for the free warrants rather than to sell to market now!   

 

Please like us at our facebook page - Bursa Blue Ocean and complete the survey form and join out telegram group chat room!

 

https://www.facebook.com/myinvestcoach

 

Sincerely,

 

Humble Pie 

 

Disclaimer and Declaration

 

The information is meant for the members of Bursa Blue Ocean (BBO). Disclosure and distribution of the message without the permission of BBO is prohibited. The full content of the article and write ups are for educational purposes only and should not be used as investment recommendations. We are not responsible for all investment activities conducted by the participants and cannot be held liable for any investment loss.

 

 
 

 

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2 people like this. Showing 14 of 14 comments

valuelurker

Without implied volatility cant calculate options price what a bunch of donkeys dont know anything about options pricing dont simply say cant calculate or use the terms la damn obvious nuubs download some free model with inputs with no inkling of options models

2017-05-11 00:08

livingston

Let's look at one of the famous Options Pricing Model available:

The Black-Scholes-Merton model makes certain assumptions:
• The option is European and can only be exercised at expiration
• No dividends are paid out during the life of the option
• Efficient markets (i.e., market movements cannot be predicted)
• There are no transaction costs in buying the option
• The risk-free rate and volatility of the underlying are known and constant
• That the returns on the underlying are normally distributed

You may refer more on: Options, Futures, and Other Derivatives, 8th Edition, Copyright © John C. Hull 2012 (pages 313-315).



There are few challenges by using Black-Scholes-Merton for Dancomech:

1. Company warrants is American and not European – Item 1 Not fulfilled
2. There is 30% dividends pay out committed by the Management – Item 2 not fulfilled
3. The Implied Volatility of an option is the volatility for which the Black-Scholes-Merton price equals the market price. Traders and brokers often quote Implied Volatilities rather than prices in RM.
4. When a regular Call Option is exercised the stock that is delivered must be purchased in the open market but when a warrant or executive stock option is exercised new Treasury stock is issued by the company. After the Options have been issued it is not necessary to take account of dilution when they are valued but company warrant yes.

With the limitations mentioned, to get a good FV is rather difficult. The price can be calculated once the warrant is already IPO. Options Pricing is more suitable in Trading Options.

2017-05-11 13:45

livingston

Put/Call Parity Options Pricing defines the relationship that must exist between European put and call options with the same underlying asset, expiration and strike prices (it doesn't apply to American-style options because they can be exercised any time up to expiration)

- Company Warrants Eg. Dancomech is American Style as it can be exercised any time-

2017-05-11 14:06

livingston

Cox-Ross-Rubinstein Method

The CRR model makes certain assumptions, including:

No possibility of arbitrage; a perfectly efficient market
At each time node, the underlying price can only take an up or a down move and never both simultaneously


Question to ponder: Is Malaysia Warrants are perfectly efficient that leaves no room for arbitrage? Each calculation of pricing is either up or down vs the price.

Suitable to be used in company warrants analysis in Malaysia?

2017-05-11 14:11

livingston

For readers to know more as there is a comment given above suggesting on using Options Pricing to do a calculation of Fair Value for the company warrant:

If the subject of my sharing was referring to Call Warrant and not Company Warrant for Dancomech, then the idea of using Options Pricing is doable. Let's look at Black Scholes Merton:

Difference:

1. Call Warrants in Malaysia consists of European Style. So it fulfill the required condition by Black Scholes Merton Model.

2. When Call Option is exercised, there is no effect of dilution. Company warrants yes.

By using Black Scholes (Option Pricing) to calculate for the FV of Call Warrants is not perfect but it do eliminate 2 additional parameters required for analysis compared with using Black Scholes to analyze Company Warrants.

Most analysis that went wrong mainly because the user used the Wrong Base and the Wrong Multiple to build the Model and calculated wrongly for the Fair Value. The standard deviation will be high and the result will be less reliable. So, we have to be careful with using certain models to calculate. When we are not sure, it would be better not to forcefully build a model just to get a targeted FV.

Thank you

2017-05-21 16:23

FlyFlewFlown

Hello Sifu,,,now making losses still want give excuses?
Warrant make money so what???
Mother drop like hell,,,,suddenly so quiet in the group???
Sifu level,,,kikiku

2017-09-30 12:23

warchest

who is this Livingston? Sound like another Holland Self-professed sifu.

2017-10-13 11:18

FlyFlewFlown

Is a brilliant Holland Sifu
Nice buy call by the way
Now hide inside cave licking wound!

2017-11-06 17:00

warchest

rubbish analysis. too much theory but lost all the practicality. sound like an amateur analysis from Livingston

2017-11-06 17:20

FlyFlewFlown

Where r u holland sifu 188& Kar Jun
Hiding inside cave???
Kikiki

2017-11-07 17:19

FlyFlewFlown

Best pick by Bursa Blue Ocean: OCK-wa, TEKSENG,SYF,OWG,TUNEPRO,DANCO,MKH,CSCENIC
Good Job HUMBLE188,,,first class to Holland

2017-11-07 17:19

FlyFlewFlown

Now Humble188 got one dog keep barking on bursa blue ocean
Good Job,,but won’t change the share price
So-high

2017-11-11 17:03

FlyFlewFlown

Humblepie and Kar Jun totally disappeared from BBO
Nice job!

2017-11-13 16:47

warchest

Humblepie and Kar Jun must be from syndicate of BBO. Doesn't make sense promoting at so high price

2017-12-06 10:01

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