• FY23 core net profit of RM22.1m was largely in line at 96%/96% of our/Bloomberg consensus estimates.

• FY23 core net profit rose 2.2% yoy despite flat revenue, as trading revenue growth and margin more than offset the decline in metal stamping revenue

• Reiterate Add, with an unchanged TP of RM0.58 (based on 10x FY24F P/E).

FY23 core net profit and DPS largely in line

• Dancomech yesterday (26 Feb) reported FY23 core net profit of RM22.1m, largely in line at 96%/96% of our/Bloomberg consensus forecasts. 4Q23 core net profit fell 47.8% yoy (+5.7% qoq) to RM5.3m on the back of revenue decline and weaker operating margin.

• Dancomech declared a 4Q23 interim DPS of 1.5 sen (4Q22: 1.25 sen), bringing FY23 DPS to 2.25 sen, largely in line at 96% of our FY23 DPS estimate of 2.33 sen, but only at 90% of Bloomberg consensus’ FY23 DPS estimate of 2.5 sen. FY23 DPS of 2.25 sen translates to a payout policy of 45% of its net profit.

Trading revenue continues to offset metal stamping weakness

• 4Q23 revenue fell 15.3% yoy (-6.4% qoq) to RM51.7m as metal stamping segment revenue fell 30.5% yoy (+1.4% qoq) due to lower demand from the air-conditioning industry. However, higher contributions from the trading segment, whose revenue grew 6.7% yoy in 4Q23 due to stronger demand, mainly from palm oil and oil and gas companies, helped to cushion against the decline in metal stamping revenue.

• 4Q23 EBITDA margin fell 7.6% pts yoy to 15.1% (-1.1% pt qoq) as the gross margin of the trading segment was lower in 4Q23 vs. 4Q22 due to the depreciation of RM as well as more intense price competition .

• On a cumulative basis, FY23 revenue stayed flat yoy at RM211.8m but core net profit rose 2.2% to RM22.1m. This was due to higher gross profit, thanks to the higher revenue from trading (+30.7% yoy), which generated a higher gross profit margin compared with other segments in FY23, aided by price adjustments and easing competition in 4Q23. According to Dancomech, despite the yoy decline in the trading segment’s gross profit margin in 4Q23, its gross margin was still higher than other segments .

Reiterate Add, with an unchanged TP of RM0.58

• We reiterate Add call and TP of RM0.58 (based on FY24F P/E of 10x, its 7-year historical mean since listing in 2016). We like Danco for: i) its undemanding valuation, as it is currently trading at 8.1x CY24F P/E (4.1x FY24F ex -cash P/E), vs. its average P/E of 9.0x since listing, with a healthy FY22-25F EPS CAGR of 9.7x, ii) its attractive dividend yield of 5.4-6.2% for FY24-25F, and iii) the defensive nature of its businesses (diversified 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 re-rating catalyst: robust earnings delivery in FY24-25F.

Source: CGS-CIMB Research - 27 Feb 2024