Dutech Holdings Ltd (SGX:CZ4) is a global leading manufacturer in the high security equipment industry. It is a leading Original Design Manu...

Weekly Superstock Scan 22 Aug 2016 - 26 Aug 2016: Dutech Holdings Limited (Singapore)

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Dutech Holdings Ltd (SGX:CZ4) is a global leading manufacturer in the high security equipment industry. It is a leading Original Design Manufacturer ("ODM") and the largest producer in Asia in terms of sales and production capacities. Dutech supplies a wide range of high security products such as Automated Teller Machines (“ATM”) safes, bank safes, gun safes, commercial safes, and cash handling systems for both commercial and consumer uses. Additionally, Dutech designs and manufactures intelligent terminals.





Dutech has 2 reportable segments that offer different products and services, and are managed separately because they require different technology and marketing strategies:

  • High Security – Design and manufacture of Automated Teller Machine (“ATM”) safes, fire-resistant commercial safes, safes for storage of weapons, and other security products.
  • Business solutions – Provide business solutions to customers by designing, engineering, manufacturing and assembling electro-mechanical equipment and modules, precision engineering parts, semi-conductor instruments and other modules products.


Technical



Dutech has form a long flat base for the whole of 2015. It was only in the beginning of 2016 that Dutech begins its strong ascend from about $0.27 to $0.45. In the $0.45 region, it begin to consolidate since the beginning of June for the next two months.

Last week, Dutech broke strongly above this second base, rising from $0.465 to $0.495 in one week. The rise was also accompanied by strong volume of 9 times its weekly average volume. The reason of the rise was the release of the second quarter results.

Fundamentals



Including the current quarter, Dutech has registered 4 consecutive quarters of year-on-year (yoy) increase in EPS. The 4 quarters may be an under-count. Dutech's earnings fluctuate due to its recent acquisition, reporting significant "Bargain purchase arising from the acquisitions" for some quarters. I do not have good data for earnings excluding one-off items for Singapore stocks, so using gross profit as a proxy, Dutech reported 7 consecutive quarters of yoy increase in gross profit.

It is a good sign that the increase in profit is accompanied by increase in revenue over those quarters.

Acquisition of DTMT and Krauth

Dutech has shown its intention in moving higher up the value chain through its acquisitions.

In October 2014, Dutech acquired DTMT, a German electromechanical solutions provider, to broaden its market base and to penetrate the higher value-adding intelligent terminal business through developing products such as gaming and ticketing machines.

In January 2016, Dutech acquired Krauth Technology GmbH, another German developer and producer of solution products such as Auto-ticketing machines and money changers, which can synergise with business solutions segment of the Group.

These two companies have already contributed to the revenue of Dutech in the recent quarters. More importantly, the acquisitions will allow Dutech to enhance the growing self-service machines and gaming terminal business.

Developments with Key Customers

Dutech's key customers are Wincor Nixdorf and Diebold, the world's 2nd and 3rd biggest ATM makers by market share. Diebold is offering a cash and share offer for Wincor Nixdorf which will create a new ATM giant. The merged company will focus on software, thus the large bulk of manufacturing will be outsourced to Dutech. 

The supply chain of ATM is complex and Wincor Nixdorf and Diebold are dependent on Dutech on their parts and unlikely to change supplier. Dutech is likely to benefit greater from Wincor and Diebold's merger.

Matrices
+ Annualised P/E of 6.57 based on trailing 12 months. The third quarter contributes close to half of Dutech's net income so the ratio should be reduced when Dutech reports its third quarter results.
- Large float of 537 million shares, more than 200 times its daily average volume.

Risk Factors/ Things I do not Like

  • Concentration Risk - Based on their latest annual report, their top three customers (presumably include Wincor and Diebold) contributed to more than one third of its 2015 revenue. While the switching cost is high, it remains a possibility and the consequences will be very severe with the concentration. 
  • Cashless Alternatives - Recently we have seen a number of cashless alternatives gaining traction, such as Visa Paywave, Apple Pay, Google Pay etc. This trend may reduce the need for cash and therefore ATM, or at least lower the rate of replacement with lower usage.
  • S-Chip - This company is solid, but is still a S-Chip (China companies listed in Singapore) which Singapore investors are weary about.




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