Truth Spoken for D’nonce Technology Berhad

Quick disclaimer before we proceed – I do not hold shares of DNONCE nor do I plan to buy the company’s shares anytime soon. Make your own decision to buy or sell upon reading the article.

The roller coaster in share price for DNONCE had no doubt raised several questions with regards to the quality of the company, especially one of the substantial shareholders – Toe Teow Heng disposed 28,207,900 shares in the open market and ceased to be a substantial shareholder of the company. The current CEO of the company – Tho Yow Yin had disposed another 4,000,000 shares in the open market, too.

In total, they had disposed a total of 32,207,900 shares in the company, equivalent to 10.28% of the company.

So... what is going on?

From the audited report the company had published on 16^th August 2021, we can tell that there are only 2 substantial shareholders of DNONCE. Normally, one would not dispose the shares and pare down the stakes from 9.01% to less than 5.0%. UNLESS someone is buying it off the market from them.

Well, perhaps the huge volume could absorb the shares, but retailers would have dumped it on the first day and exited the position – someone must be absorbing the shares behind the scenes.

That leads us to the next question – WHY?

Fundamentally, DNONCE is still quite attractive in which since the CEO joined the company, their turnaround had been quite successful. E.g., the PATAMI for 16 months ended 2020 April was only RM0.7 million but had increased to 13.8 million in the 12months ended 2021 April.

I guess, we need to give him the credit for the turnaround of business.

In terms of business, DNONCE was involved in two main industries – namely the healthcare industry and E&E / semiconductor business. For starter, I’m sure most of you heard of DNONCE’s corrugated packaging business for major glove players in Thailand. Not to linger on the glove story too long, just a quick reminder that packaging business for glove is not impacted by reduction in ASP for gloves. In fact, ramping up in glove supplies will eventually benefit them.

Based on information available online, the machinery for the Thailand factory had started to move in the new machineries for increased capacity production. However, the additional capacity was not utilized yet at the moment.

On the E&E and semiconductor end, most likely the orders are still strong given the overall sector’s performance. They also manufacture industrial and carton boxes primarily for the furniture industry, automotive industry, and F&B industry. More than likely this division was impacted by the recent MCO.

All in all, DNONCE’s financials are still considered solid. Rakuten used to give the company a TP of close to 80 cents, but it seems like no further follow ups from them.

“If the business is good, why are they selling the stakes?”

I have the exact some question too.

I believe their disposal are aligned as the company will be overtaken by a third party. A total 10.28% disposal must have alarmed Backstream as the largest single shareholder. But seeing no action from them, a change of hand behind the controlling hands must have occurred.

Hence, the question next is who the buyer is and why do they purchase it. For Tho Yow Yin, I think his role is done for turning around the company and should there by any change of major shareholder, the board and management team will reset, hence it is actually a smart move for him to move one day ahead. Either way, DNONCE was already in steady operations.

All in all, the industry that DNONCE operates in should have very good prospects (E.g., increasing demand from gloves, E&E and semiconductor sector) and both revenue and profit. Based for the TTM EPS of 4.79, DNONCE is now trading at a 10.6 times PER. With reasonable growth and potential acquisition by some big parties (who would have the capacity to takeover the shares anyway), I think DNONCE should be an interesting play at the current level.

Of course, I could be wrong.