IPO TA Securities Wednesday, May 27, 2015 FBM KLCI: 1,755.05 Sector: Plantation A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048 Dolphin International Berhad Fair Value: RM0.88 Main Market Listing Attractive Earnings Growth Not rated THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Angeline Chin Tel: +603-2167 9611 [email protected] Dolphin International Berhad (Dolphin) offers investors opportunity to tap into the Palm Oil Mill (POM) Machineries Sector in Malaysia and Indonesia with an attractive valuation. We believe the group is still in a nascent growth phase and has huge room for growth. It only owns about 3.2% market share in the POMs machineries sector industry. Based on its IPO price of RM0.68, Dolphin will be valued at 9.5x and 7.5x PER in FY15 and FY16, respectively. We fairly value Dolphin at RM0.88, using CY16 EPS of 9.0sen and pegging fair multiple of 9.8x. Total upside works out to be 32.6% (including dividend yield). q www.taonline.com.my Share Information Listing Main Market Enlarged Share Capital (mn) 222 Market Cap @ RM0.68 (mn) 151.0 Par Value (RM) 0.20 Issue Price 0.68 Oversubscription rate NA Estimated free float (%) NA Tentative Listing Date 9-Jun-15 Tentative Listing Dates CORPORATE PROFILE Dolphin is principally involved in the design, development, fabrication and sales of its own-brand products for the POM machineries sector in the palm oil industry. The group controls 3.2% market share in the POM machineries sector in Malaysia, according to an independent research report by Protégé Associate S/B. The group was founded by Mr. Low Teck Yin and Mr. Hoh Yeong Cherng in 1992. It products are exported to 6 countries, namely Indonesia, Thailand, Myanmar, Papua New Guinea, India and Colombia, although Indonesia commands a lion share of the exports sale. The group currently has a total of 83 employees (including directors and management). STATISTICS OF THE IPO New Shares : 46.0mn shares Offer for sale : - None Enlarged issued and full paid up capital : 222.0mn shares Market Cap @ IPO price: RM151.0mn CORPORATE STRUCTURE The figure below illustrates the group’s corporate structure and the respective principal activities: Figure 1: Corporate Structure Source: Company, TA Research Page 1 of 8 Event Tentative Date Opening of the IPO 20-May-15 Closing of the IPO 28-May-15 Balloting of Applications 1-Jun-15 Allotment of Shares 8-Jun-15 Listing 9-Jun-15 Ratio & Analysis NTA per share (Proforma) (sen) 0.30 Price to NTA (x) 2.3 Proforma ROE (%) 23.3 Proforma ROA (%) 9.2 Proforma Net Gearing (x) 0.4 Proforma Current Ratio (x) 1.4 Utilisation of Proceeds RMmn % 11.0 35 Working capital 6.1 19 Set-up of a R&D facility Repayment of borrowings 4.0 13 6.0 19 Estimated Listing Expenses 4.2 13 31.3 100 Capex TOTAL TA Securities 27-May-15 A Member of the TA Group BUSINESS DESCRIPTION Dolphin provides products and related services for POM automation and control as well as Mechanical & Electrical (M&E) and/or full turnkey solutions in the construction of POM. The key competitive advantage – Dolphin is able to provide an integrated products that enhances mills productivity (higher OER), enhance safety and improve the overall customer economics. Its business activities are segmented into contract and/or orders based and each project typically takes between 2 weeks to 24 months to complete, i.e. from the design to delivery and commissioning at the project site. Malaysia and Indonesia are its major market, cumulatively contributed 76.7% and 22.0%, respectively of FY14 revenue. Figure 2: The Groups’ Products, Solutions and Services Source: Company, TA Research Figure 4: Revenue Breakdown 120 Sale of milling system Sale of milling software Supply of parts & maintenance services Provision of solutions 100 80 48.2 60 42.5 40 4.3 24.1 20 4.8 5.9 0.12 15.80 16.71 FY11 FY12 0.14 89.2 0.10 35.59 4.7 0.11 10.50 0 FY13 FY14 Source: Company, TA Research Page 2 of 8 TA Securities 27-May-15 A Member of the TA Group Figure 3: Key Milestones 1997 • Established Dolphin Engineering, the first company within the Group. 1992 • Awarded Main Contractor Certification by the Ministry of Finance and the Construction Industry Development Board. 2004 • Successfully supplied and installed its first generation Cage Indexer System. • Secured first overseas POM contract for its Cage Indexer System. 2011 • Penetrated into the Latin American maket. 2002 2010 • Secured first M&E solutions contract. • Established PT Dolphin Indonesia, its first overseas subsidiary. Source: Company, TA Research Figure 4: Conventional Cage Handling System to Automated Cage Handling System Source: Company, TA Research Figure 5: Dolphin’s Wide Range Of Products And Solutions Covering Every Aspect of The POM Process Source: Company, TA Research Page 3 of 8 • Secured its first turnkey solutions contract. 2012 TA Securities 27-May-15 A Member of the TA Group Figure 6: Some of Dolphin’s Major Products Source: Company, TA Research Fabrication Facilities and Capacity Currently, Dolphin’s main fabrication facilities and the workshop for the production and assembly are located in Puchong, Selangor. As part of the expansion plan, the group will utilise a substantial sum part of the IPO proceeds (RM11mn) to renovate and expand its presently vacant factory building in Shah Alam. Upon completion, the build-up area will double to 2,425sqm. Management guided that the actual increase in the production capacity and utilisation rates depends on the number and type of products sold by the group. Due to the nature of its business, i.e. project basis, the utilisation rate is derived based on the working hours of its in-house fabrication capacity. Figure 7: Capacity vs. Utilisation Rate hours Annual maximum capacity… 16,000 Utilisation rate 100% 90% 14,000 80% 12,000 70% 10,000 60% 8,000 50% 6,000 40% 30% The decrease was due to decrease in orders received from POM machineries traders 4,000 2,000 20% 10% 0 0% FY11 FY12 FY13 FY14 Source: Company, TA Research Page 4 of 8 TA Securities 27-May-15 A Member of the TA Group A One-Stop Solution Provider Dolphin is led by an experience management team, which has been in the POM machineries sector for more than 20 years. Capitalising on their capability, the group is able to provide a total in-house solutions, from process automation and controls to electro, pneumatic and hydraulic engineering to software development. The group’s software programs has enabled customers to appropriately allocate resources to improve productivity, to reduce operational cost and to enhance product quality. Besides, the group is also able to offer its integrated products, which automate POM functions for enhanced productivity and efficiency, provides a safer working environment, reduce unplanned maintenance and operation down-time. This ensures optimum productivity and also maximize oil recovery. Favourable Industry Growth Based on Protégé Associate Sdn Bhd, an independent market research report, the Malaysia and Indonesia’s palm oil industry are on a trajectory of long-term growth, driven by the continuous global demand for palm oil. The POM machineries sector in Malaysia and Indonesia are expected to grow at a CAGR of 11.4% and 11.3% between 2014 -2019. This augur well for Dolphin as the group has an established good record in the industry. Note that the group’s has an outstanding order book of RM172.2mn as at 23 April 2015 and 98% of it will be recognised in FY15. Despite Low CPO Price, There are Pockets of Opportunity Underpinned by the slowdown in the economy growth, ample supply of vegetable oils globally, sharp correction in the crude oil price reducing demand for palmbased biodiesel. In the near term, a key concern is that plantation companies will cut back new investments on expanding plantation acreage as well as processing capacity. This may affect some of Dolphin’s potential businesses, particularly in Malaysia. That is because planted area had only grew by 2% - 3% p.a. since 2010. That means only a minimal needs for new milling capacity. We also understand that some mills upgrade (this is where Dolphin can benefit) have been deferred. However, Indonesia still provides ample room to grow. The planted area had grown by 9% p.a. in 2006 – 2013. As the mature acreage increases, we expect more investment to go into building new POMs, despite the low CPO price. We estimate that approximately 1.7mn ha of land was planted in the 2010 – 2014 period, ensuring a sustained FFB production growth until 2019/20. We believe Dolphin could benefit from the resulting expansion in milling capacity. As highlighted above, in FY14, Indonesia already accounted for 22% of the group’s revenue. Figure 8: Palm Oil Planted Area in Indonesia (‘000 ha) Palm Oil (LHS) 7,000 YoY Growth (RHS) 14% 6,000 12% 5,000 10% 4,000 8% 3,000 6% 2,000 4% 1,000 2% 0 0% 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company, TA Research Page 5 of 8 TA Securities 27-May-15 A Member of the TA Group Figure 9: Palm Oil Planted Area in Malaysia (‘000 ha) Palm Oil (LHS) 6,000 YoY Growth (RHS) 5% 5% 5,000 4% 4% 4,000 3% 3,000 3% 2% 2,000 2% 1% 1,000 1% 0 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Company, TA Research Strong Orderbook to Boost Sales Growth The group has a strong order book of RM172.2mn as at 23 April 2015 (based on total contract value less progress billings). According to IPO prospectus approximately 98% of the orderbook is expected to be completed by 2015 and about 2% in 2016. Nonetheless, due to the unfavourable CPO price, we expect some customers may delay the project to 2016. As such, we had conservatively assumed only 70% of the order book will be recognised this year and the balance in FY16. Figure 10: Orderbook Breakdown Provision of solution 98% Sale of milling systems and software 2% Source: Company, TA Research Intend to Adopt a Stable and Sustainable Policy upon Listing Dolphin does not have a formal dividend policy. However, the group intends adopt a stable and sustainable policy upon listing. Assuming the group pay out up to 20% of its net profit post-IPO. We estimate DPS to be 1.4 sen and 1.8 sen for FY15 and FY16, translating into dividend yield of 2.1% and 2.7% respectively. Page 6 of 8 TA Securities 27-May-15 A Member of the TA Group RISK FACTORS Dependence on Palm Oil Industry All of the group’s revenue is derived from the palm oil industry. Thus, any downturn in the palm oil industry which results in lower palm oil activities, fewer POMs being built, lack of growth in new plantation acreage will adversely affected the group’s financial performance. Foreign Exchange Risk Exposure Approximately 28.9% of the group’s revenue in FY14 is denominated in foreign currency. Thus, any fluctuations in the foreign exchange rate will adversely impact the group’s operating and financial performance. That said, management guided that the group mitigates its exposure to foreign currency fluctuations by the purchase of certain materials and parts as well as engaging subcontractors and labour in the same foreign currency to hedge sales. FINANCIAL HIGHLIGHTS Dolphin’s revenue has registered a 3-year compounded annual growth rate (CAGR) of 31.5% between FY11-FY14. While net profit also increased by 66.4% from RM7.3mn in FY11 to RM12.1mn in FY14. We estimate the group’s net profit will grow by 28.6% and 27.6% in FY15 and FY16 to RM15.6mn and RM19.9mn, respectively. Meanwhile, revenue is projected to increase by 27.6% and 24.6% in FY15 and FY16. The growth in revenue will be driven by the strong orderbook and more demand for its parts and maintenance services, which are mostly recurring in nature. We have assumed news contract wins of RM150mn p.a. in FY15 and FY16. Figure 4: Revenue vs. Net Profit (RMmn) Revenue (LHS) Net Profit (RHS) 180 25 160 20 140 120 15 100 80 10 60 40 5 20 0 0 FY12 FY13 FY14 FY15E FY16F Source: Company, TA Research VALUATION Based on its IPO price of RM0.68, Dolphin is valued at 9.5x and 7.4x PER for FY15 and FY16, respectively. We gathered that most of Dolphin’s competitors are private companies and there are no direct listed comparable peers to the group. Hence, we fairly value Dolphin at RM0.88, using CY16 EPS of 9.0sen, pegging the fair multiple at 9.8x. This is a 10% discount to its closest peer, CB Industrial Product Holdings Bhd (manufacture of palm oil equipment and its related products and commissioning and contracting works for POMs). Total upside works out to 32.6% (including dividend yield). Page 7 of 8 TA Securities 27-May-15 A Member of the TA Group Earnings Summary (RMmn) FYE Dec 31 Revenue EBITDA PBT Tax Net Profit EPS (sen) DPS (sen) Net Dividend Yield (%) PER (x) @ IPO Price Sales Growth (%) EPS Growth (%) EBITDA Margin (%) PBT Margin (%) Net Margin (%) FY12 64.2 9.1 7.7 (0.7) 7.2 7.2 3.2 21.0 39.5 14.2 12.0 FY13 88.2 17.4 14.7 (4.0) 10.9 10.9 4.9 13.8 37.5 51.6 19.7 16.6 FY14 104.6 19.8 16.7 (4.6) 12.1 12.1 5.5 12.4 18.5 11.2 18.9 15.9 FY15E 133.4 24.4 21.1 (5.3) 15.9 15.9 7.2 1.4 2.1 9.5 27.6 31.1 18.3 15.8 FY16F 166.3 30.1 26.6 (6.6) 20.0 20.0 9.0 1.8 2.7 7.5 24.6 25.9 18.1 16.0 Source: Company, TA Research Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. For TA SECURITIES HOLDINGS BERHAD(14948-M) (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan – Head of Research Page 8 of 8
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