• We anticipate Dancomech Holdings Berhad (Dancomech) to register a weaker 2022F performance owing to 1) lower contribution from the Trading Division due to intense competition within the industry players, 2) zero contribution for MHS Solutions, and 3) margin compression arising from prolonged supply chain disruption.

• We expect contribution from the Metal Stamping Division to surpass the Trading Division in 2022 fueled by solid demand for heating, ventilation and air conditioning (HVAC), and metal furniture products.

• We initiate coverage on Dancomech with a HOLD call and TP of RM0.37, pegged at 10x PER to 2023F EPS of 3.7 sen. A

Specialist in Valves and Instruments

Founded in 1989, Dancomech has been involved in the trading of Process Control Equipment (PCE) and Measurement Instruments to end users in the Malaysian palm oil and oleochemicals industry for over 30 years. Since the listing on 21st July 2016 on Bursa Malaysia, Dancomech has expanded its business and ventured into the manufacture of industrial pumps (Pump Manufacturing), provision of material handling system (MHS) solutions, production of metal stamping parts and components, and design and manufacture of tools and dies (Metal Stamping), and electrical, electronic and instrumentation engineering (E&E Engineering), contracting, commissioning and servicing.

Uninspiring Outlook

We expect Dancomech to register a weaker 2022F earnings owing to 1) lower contribution from the Trading Division due to intense competition within the industry players, 2) zero contribution for MHS Solutions, and 3) margin compression arising from prolonged supply chain disruption. Nonetheless, we expect to see improvementsin 2023F earnings onwards powered by higher contributions from Trading, Metal Stamping, Pump Manufacturing, and E&E Engineering in anticipation of the resumption of infrastructure mega projects by the government.

Up to 40% Dividend Payout Policy

In March 2021, Dancomech revised higher its dividend policy or up to 40% of net profit from 30% previously. Assuming a 40% dividend payout ratio, we expect Dancomech to declare a gross dividend amounting to 1.3 sen/ 1.5 sen/ 1.6 sen for 2022F/ 2023F/ 2023F, translating into a 3.3% - 4.1% yield at current price.

Initiate with a ‘HOLD’ call and TP of RM0.37

We initiate coverage on Dancomech with a HOLD call at a TP of RM0.37, pegged at 10x PER to FY23 EPS of 3.7 sen. Our valuation is derived based on Dancomech 5-year historical average forward PER which is fair given the projected flat growth for the Trading Division in line with the guidance by the management.

Source: BIMB Securities Research - 12 Sept 2022