Dancomech Holdings Berhad (Dancomech) 1H23 core profit of RM9.4mn (+35.1% yoy) came in within our expectation but trailed consensus’ estimate at 47.5% and 43.5% of full year forecast respectively. 2Q23 core profit jumped by 16.9% QoQ to RM5mn due to higher contribution from Trading Business, Metal Stamping and E&E Engineering in line with the recovery of the local and overseas market post the covid-19 pandemic. Nevertheless, the Metal Stamping business experienced a decline in demand due to reduced orders from customers in the air conditioning industry. Maintain our call for Dancomech with unchanged TP of RM0.47, pegged at 10.5x PER to 2023 EPS of 4.4 sen.

• Against estimate: Inline. 1H23’s core profit of RM9.4mn was broadly inline with our expectation but trailed consensus’ estimate at 47.5% and 43.5% of full year estimates respectively.

• Dividend. The company declared a first interim DPS of 0.75 sen which is equivalent to 1H22 and implies payout ratio of 35.5% (1H22: 41.3%). Nevertheless, we expect Dancomech to declare a DPS of 2 sen in 2023F.

• QoQ. Dancomech’s 2Q23 core profit soared by 16.9% QoQ in tandem with the increase in revenue (+9.7% QoQ) due to higher contribution from the Trading (+25.1% QoQ), E&E Engineering (+131.1% QoQ) and Pump Manufacturing (+33.7% QoQ) business divisions (Table 2).

• YoY. 2Q23’s core profit grew by 30.6% YoY supported by higher contribution from the Trading segment which accounted for 46% of total revenue, thanks to the recovery of the local and overseas market post COVID pandemic. However, the Metal Stamping business which represents Dancomech’s second largest revenue (40% of revenue) fell by 24.4% due to lower demand from customers in the air-conditioning industry. Given the Trading nature of business which provides a higher margin, EBITDA margin expanded slightly by 0.3ppts YoY to 14.0% in 2Q23 from 13.7% in 2Q22.

• Outlook. Despite the challenging and uncertain market conditions, we foresee gradual improvement from Trading, Pump Manufacturing and E&E Engineering divisions. This positive outlook is primarily attributed to the post reopening of international borders following the COVID-19 pandemic. Additionally, we believe the company remains committed to actively pursuing potential acquisitions and collaborations as part of its ongoing efforts to enhance its financial performance.

• Our call. Maintain a BUY call on Dancomech with unchanged TP of RM0.47, pegged at 10.5x PER to 2023 EPS of 4.4 sen.

Source: BIMB Securities Research - 25 Aug 2023