Denko a prime proxy to a prominent floor-care player

PETALING JAYA: AmBank Research has initiated coverage on Denko Industrial Corp Bhd with a “call” and a fair value of RM1.76 based on the price-to-earnings ratio (PER) of 13 times.
“This represents a premium to its listed peers in the region which are trading at 10 times. We attach a premium to Denko given that it is a stronger proxy to its key customer, which enjoys robust growth prospects. Among its peers, Denko has the highest share of orders from the key customer,” it said in a research note today.
The research house said Denko is a prime proxy to its key customer’s innovation and growth prospects. For 2017–2020, unit sales of the key customer are expected to grow at an astounding three-year compound annual growth rate (CAGR) of 29%, underpinned by its constant innovation and fast-selling home appliances.
“Based on our projections, Denko should account for circa 30% of the key customer’s total box-build requirements in 2018 (in terms of volume), rendering it the largest supplier for the customer. Being a major supplier to the key customer, Denko is expected to register robust growth through 2020, mirroring the prospects of its key customer,” it added.
Denko has recently purchased two new factories with an additional 376,000 sq ft of production space, equivalent to a 49% increase from its existing 774,000 sq ft. This gives the group sufficient floor capacity to house six to 10 additional assembly lines.
For a start, Denko is installing four additional assembly lines in the Dewani building to cater for new jobs that have already been secured – two for a floor-care product and two for a healthy lifestyle product. Currently, two of the assembly lines are already in production, while another two are scheduled to commence by the end of 1QFY18, just in time to give FY19 a full earnings boost.
Denko is also the largest supplier of filters for its key customer globally, commanding a formidable market share of 80-85%. The heavy dependency on Denko for filter supplies demonstrates the trust and relationship the group has built with the key customer over the years. While revenue contribution from the business was a mere 10-15% in the past two years, AmBank Research said its gross margin in the filter business is distinctly more superior (4-5ppts) to that of the conventional box-build business.
“All-in, we expect profit after tax to register a stunning two-year CAGR of 39% for FY17-FY19F, underpinned by higher box-build orders from new products and a margin expansion due to better product mix.”