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03 May 2013 09:17 AM
DEMCO - BT 17.30 - Buy
Good decision making

Research by: Jaroonpan Wattanawong


Thai Vegetable Oil  TVO

Good decision making

Well controlled business risks. Although DEMCO has won fewer projects than market estimates, we still have a positive view on DEMCO pursuing only jobs DEMCO is expertise it with high margins. This will also help limit risks that DEMCO would have to guarantee the Chinese made solar panels over the long run and incur financial burdens, thus the d/e will not return to the high level again. The backlog has now already broken the Bt6bn level. Although we have downgraded our revenue and profit forecasts, the profit should still grow 79% YoY. We reiterate a Buy call with a TP of Bt19.50 before XA (Bt16.30/share after XA).

Signs solar farm contract of Bt1.4bn. Yesterday morning, DEMCO disclosed that DEMCO and HYDROCHINA ENGINEERING CORP. had signed a contract with EA Solar Nakorn Sawan (EA subsidiary) on 30 April 2013 to develop a 90MW solar farm valued at Bt5.5bn. Under the Consortium contract, DEMCO will take responsibility for engineering design, local material supply, civil work, electrical system, installation, and testing, valued at Bt1.38bn. HYDROCHINA will take responsibility to supply material from abroad, worth US$143.3mn (Bt4.2bn).

This is a good decision. Previously, we estimated DEMCO would be the sole contractor on this project, but DEMCO has decided to take on only the engineering and construction work (high margin of 15-20%) and passed on the low margin solar equipment to the Chinese supplier (2-3% margin), with the need to guarantee quality for 20 years to EA. We view this as a good decision as 1) the long term product guarantee with low margins is not worth the high business risk over the long run and 2) the high level of equipment sold will create a heavier financial burden, assuming DEMCO needed to inject 70% of the cash in the project during the 8-month construction period.  The interest cost would be high around Bt120mn, which would drive the d/e ratio to above the 2.0x level (vs. 1.5x in 2012 and 2.4x in 2011).

Maintain a Buy rate. We have cut the revenue from solar equipment sales valued at Bt4.2bn from our projection, leaving only engineering work of Bt1.38bn and thus our revenue forecast drops by 30% to Bt7.9bn. However, the gross margin will likely increase by 200bps to 14.4% from the absence of the low margin sales and thus the net profit forecast will drop only 15% to Bt710mn, reflecting strong growth of 79% YoY. Hence, our SOTP TP after XA will decline just 10% to Bt16.30/share (or Bt19.50 before XA).

DEMCO – Summary Earnings Table

FYE: Dec 31 (Btmn)

2010

2011

2012

2013F

2014F

Revenue

2,493

3,289

5,940

7,961

7,918

EBITDA

160

218

567

826

807

Recurring Net Profit

89

119

396

710

775

Net Profit

89

119

396

710

775

EPS (Bt)

0.23

0.27

0.78

0.94

1.03

EPS growth (%)

35.3

17.4

188.9

21.1

9.1

DPS (Bt)

0.15

0.12

0.35

0.38

0.41

 

 

 

 

 

 

PER

73.0

62.2

21.5

17.8

16.3

EV/EBITDA (x)

42.6

36.6

17.4

16.0

15.8

Div Yield (%)

 0.9

 0.7

 2.1

 2.2

 2.5

P/BV(x)

6.29

6.83

4.87

3.29

2.92

 

 

 

 

 

 

Net Gearing (%)

22.1

58.1

78.1

14.6

2.3

ROE (%)

8.5

11.0

22.7

18.5

17.9

ROA (%)

4.5

3.2

8.9

11.4

11.6

Cons. Net Profit (THB m)

 

 

 

 

 

Source: Company reports and MBKET

INCOME STATEMENT (Btmn)        
FY December 2011 2012 2013F 2014F
       
Revenue 3,289 5,940 7,961 7,918
EBITDA 218 567 826 807
Depreciation & Amortisation 33 23 25 27
Operating Profit (EBIT) 185 544 801 780
Interest (Exp)/Inc -41 -108 -90 -72
Associates -11 -12 -14 -15
One-offs  -   -   -   - 
Pre-Tax Profit 176 506 931 1,015
Tax -48 -78 -186 -203
Minority Interest 3 -20 -21 -22
Net Profit 119 396 710 775
Recurring Net Profit 119 396 710 775
       
Revenue Growth % 31.9 80.6 34 -0.5
EBITDA Growth (%) 36 159.9 45.7 -2.3
EBIT Growth (%) 57.2 193.9 47.2 -2.6
Net Profit Growth (%) 33 233.4 79.4 9.1
Recurring Net Profit Growth (%) 33 233.4 79.4 9.1
Tax Rate % 27.5 15.4 20 20
         
       
BALANCE SHEET (Btmn)        
FY December 2011 2012 2013F 2014F
       
Fixed Assets 307 315 336 349
Other LT Assets 777 1,320 2,315 2,315
Cash/ST Investments 201 204 490 934
Other Current Assets 2,371 2,600 3,104 3,106
Total Assets 3,656 4,439 6,245 6,705
       
ST Debt 768 1,530 1,030 1,030
Other Current Liabilities 1,746 1,099 1,317 1,301
LT Debt 31 11 3  - 
Other LT Liabilities 35 52 52 53
Minority Interest 18 38 38 38
Shareholders' Equity 1,058 1,709 3,805 4,283
Total Liabilities-Capital 3,656 4,439 6,245 6,705
       
Share Capital (m) 438 507 752 752
Gross Debt/(Cash) 826 1,569 1,051 1,033
Net Debt/(Cash) 625 1,365 561 99
Working Capital 58 175 1,247 1,709
BVPS 2.46 3.45 5.11 5.75
         
       
CASH FLOW (Btmn)        
FY December 2011 2012 2013F 2014F
       
Profit before taxation 176 506 931 1,015
Depreciation 33 23 25 27
Net interest receipts/(payments) -41 -108 -90 -72
Working capital change -222 540 -269 5
Cash tax paid -48 -78 -186 -203
Others (incl'd exceptional items) 518 -1,288 48 27
Cash flow from operations 416 -405 459 799
Capex  -31 -27 -40 -40
Disposal/(purchase)  -  1 2 3
Others  -692 -557 -1,002 -3
Cash flow from investing -723 -583 -1,040 -40
Debt raised/(repaid) 404 743 -518 -18
Equity raised/(repaid) -26 377 1,616  - 
Dividends (paid) -35 -129 -231 -297
Interest payments -41 -108 -90 -72
Others 41 108 91 72
Cash flow from financing 343 991 867 -315
Change in cash 36 3 286 445
         
       
RATES & RATIOS        
FY December 2011 2012 2013F 2014F
       
Gross Margin % 12.4 14.7 14.4 14.4
EBITDA Margin % 6.6 9.6 10.4 10.2
Op. Profit Margin % 5.6 9.2 10.1 9.9
Net Profit Margin % 3.6 6.7 8.9 9.8
ROE % 11 22.7 18.5 17.9
ROA % 3.2 8.9 11.4 11.6
Net Margin Ex. El % 3.6 6.7 8.9 9.8
Dividend Cover (x) 0.4 0.4 0.4 0.4
Interest Cover (x) 4.5 5.1 8.9 10.9
Asset Turnover (x) 0.9 1.3 1.3 1.2
Asset/Debt (x) 1.4 1.6 2.6 2.8
Debtors Turn (days) 218.6 72.4 73 73
Creditors Turn (days) 112.8 45.2 45.6 45.6
Inventory Turn (days) 27.4 14.8 15.2 15.2
Net Gearing % 59 79.9 14.8 2.3
Debt/ EBITDA (x) 11.8 4.7 2.9 3
Debt/ Market Cap (x) 0.4 0.3 0.2 0.2
         

Source: Company reports and MBKET

Disclaimer : This research report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation, or particular needs of any specific person who may receive this report. The information contained herein is provided on the basis of information received or provided to us, but its completeness and accuracy are not guaranteed. Opinions expressed in this report are subject to change without notice, and no part of this publication is to be construed as an offer, or solicitation of an offer, to buy or sell any securities or financial instruments whether referred to therein or otherwise. We do not accept any liability whatsoever whether direct or indirect that may arise from the use of information contained in this report, or a reliance on our opinion expressed in this report. Maybank Kim Eng Securities (Thailand) Public Company Limited, its associates, directors, connected parties and/or employees may from time to time have interests and/or underwriting commitments in the securities mentioned in this report.