[CZ4] DuTech Holdings Limited 2016 Analysis

This company is recommended on the list of very good companies with strong fundamentals in 2016

Price to Buy: S$0.391 [Undervalued]
Valuation Valid until release of 31 December 2016 Annual Report

COMPANY OVERVIEW

Dutech Holdings Limited is engaged in manufacturing and distribution of high security products, semiconductor instruments and parts, and precision machining parts. The company's products includes ATM safes, banking safes, commercial safes, cash handling systems, fire-resistant commercial safes, and safes for weapons. Dutech Holdings is based in Shanghai, China with operations in North and South America, Europe, and the Asia Pacific. The company was founded in 2000.

VALUATION

Valuation is obtained by using an algorithm to project next 5 years' financial data based on past 5 year's data trend. Based on the trajectory, predicted dividends, owner's earnings and free cash flows are obtained to derive a range of discounted cash flow valuation. The terminal value used in the calculation is the projected Net-Net of the company after 5 years, on the assumption that we are liquidating the company.

Although past results does not necessarily equal to future performances, when there is a track record, the chances of similar results happening in future is higher. The concept is to project specific line drivers in the balance sheet, income statement, and cash flow statement and model the respective changes to the bottom line. 

For margin of safety, a very high discount rate of 18.45% is used when discounting cash flows. The discount rate is the expected return for doubling an investment in 5 years, adjusted for an inflation of 3% each year. The final calculated intrinsic value is further discounted by another 20%.

This valuation method is applied unilaterally to all the companies in my screener and the predictions are best applicable for companies with strong Profitability, Financial health and Sustainability which translates into consistency. Consistency is the key ingredient for more accurate predictions and higher probability of derived value being right.

Net-net per share is derived by discounting each category of balance sheet items according to liquidation value estimates. The final sum of all items is divided by the total number of shares to derive a price of S$0.218 per share. This is the price each equity shareholder is entitled to if the company is forced to liquidate, after repaying all its debt and liabilities. 

DuTech is valued at an intrinsic value of S$0.489. With a margin of safety of 20%, the price to buy is anything less than S$0.391. At the current price of S$0.305, DuTech is deemed as undervalued. 

For further understanding of the thoughts behind the valuation, please check out this article on how should stock investments be valued.

PROFITABILITY

A variety of financial ratios were used to construct the above profitability indicators with the purpose of simplifying analysis of financial statement data. The fresh green indicators denotes that the benchmark is exceeded while yellowing-green to red denotes the degree of the indicator falling below benchmark. 

The above histogram shows the simple profitability measurement of various components in the income statement. Revenue (blue) and profit margin (yellow) are on uptrend for past 5 years while cost has been maintained, indicating that the company was able to increase revenue without incurring more cost. Profit Margin has steadily increased from 8.6% in FY2011 to 12.6% in FY2015. 

Positive free-cash-flow (FCF) indicates that the company is able to generate enough cash to fund its capital expenditures and investments with enough leftover for shareholders. As seen from the above histogram, DuTech has been able to generate positive FCF 4 of the past 5 years.

FINANCIAL HEALTH

Companies with very high profits and profit margins, but are heavily in debt, are very risky companies that might turn into loss-making companies or even bankrupt in the event of economic downturn. Hence, having indicators that warns us of risky companies are important so that we are informed of the risk we are buying into. The more indicators above that are highlighted green indicates a healthier company with a low risk balance sheet. Healthy companies can weather economic downturn or interest rate increases much better in terms of having a less volatile share price. 

All of DuTech's financial health indicators are above the benchmark, which means that the company is extremely healthy.

The above histogram shows the capital structure of the company over the past 5 years. It is important to note that liabilities are not the same as debt, but debt is definitely a part of liability. The more equity (orange) you see, the better, because equity is what you own as a shareholder. The lesser the debt (grey), means that the company is less likely to declare bankrupt because only companies that are unable to repay their debt will be forced to declare bankrupt. 

DuTech has increased it debt level in FY2015 but only at a moderate level compared to total assets.The company has also managed to grow its equity for 4 of 5 FYs and doubled its total assets from S$104mil in FY2011 to S$208mil in FY2015.

SUSTAINABILITY

We love companies that can sustain the profit over the years, instead of one that is profitable only for 1 or 2 years before slumping into loss making territory again. Hence, the above indicators help us to identify such companies. 4P score, Piotrosky F score, Financial Strength, and Asset Turnover growth score are the 4 Quant Value indicators that tells us how a company has performed over the years. Margin Growth / Margin Stability are 2 bipolar indicators to tell us whether this company is a growth stock or a matured stock. 

DuTech has a margin stability of 6.6 and margin growth of 9.9%, indicating that its margin is both stable and growing over the years. The under performing F Score (Piotrosky F score) is due to declining return on assets, lesser cash flow from operation than net income before extraordinary items, and lower current ratio compared to previous FYs. 

The above histogram gives us an indication of whether there is a sudden change in the operations of the company by exhibiting the trends of each of the components in the working capital. Generally, we would like to see more receivables (yellow) than payables (orange) which indicates that the company is expecting to collect more money than it is expect to pay up. However, too much receivables may indicate that the company might be having trouble collecting its dues. Other current liabilities (peach) may include items such as Accruals, Unearned Revenue, PP&E Vendor, Deferred Income, Deposits from Customers, Mark-to-Market Instrument etc.

The working capital of DuTech has been pretty consistent and in line with its revenue growth. 

To find out whether the company is having issues collecting the money that its customers owe, we can use the Account receivable days (yellow) over the years to inform us of the trend. An uptrend is a bad sign that more customers are having difficulty paying or that the company is extending looser credit terms. 

DuTech's customers are generally paying up within 2 months, which is very beneficial to its cash flow and represent lesser occurrence of bad debt.

Accounts payable days (orange) tells us whether the company is having difficulty paying off its dues to its suppliers. DuTech has been paying its suppliers within 60 days which can help it to secure better credit terms and reducing its cost.

Inventory days (grey) has been pretty consistent, around the range of 80 days, which is assumed to be the norm.

SUMMARY

DuTech has been increasing its profit margin consistently from 8.6% in FY2011 to 12.6% in FY2015. It has managed to achieve positive FCF for the 4 of its past 5 FYs with very little debt. The company has been very healthy for the past 5 years with very light balance sheets and very little debt. It has consistent and predictable working capital and has demonstrated that it is a very sustainable business. Hence, DuTech is deemed to be undervalued and its recommended purchase price is S$0.391. 

Do check out my list of company recommendations for 2016 here. 

Official Company Website: http://www.droege-group.com/en/what-we-do/dutech-holding-limited
Company's Dividend History: http://sgxdata.pebbleslab.com/index.asp?m=2&NC=CZ4
Financial Statement Data Source: https://online.capitalcube.com/#!/stock/sg/singapore/CZ4/financials

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Do check out my analysis of other companies: http://fundamentally-invest.blogspot.sg/p/blog-page.html

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