1. business and industrial

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
angelinechin@ta.com.my
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