Dutech Holdings Limited (‘company’) is listed in Singapore and primarily operates in two segments: a) High security solutions (HSS): Manufacturing safes for ATM machines, banking, and commercial use; and b) Business solutions (BS): Manufacturing ticketing/vending machines (used for parking, gaming, lottery, etc.) and wholesaling semiconductor and precision machine parts.
Though both segments contribute equally to sales, the HSS segment contributes 85% of profits.
It is Asia’s largest operator in the HSS segment – its UL and CEN certified products are valued in Europe (60% of sales) and the Americas (25%) – but not so much in its home base of China (4%) where it doesn’t intend to compete with lower-priced offerings.
This segment, however, faces long-term headwinds due to the increasing use of cashless transactions resulting in lower demand for ATM safes. In addition, the industry faces rising raw material and labor costs. Moreover, the US-China trade spat resulted in higher costs with the use of the company’s Vietnam and Philippines production bases to serve the US market.
Its manufacturing capacity is split equally between Asia (China, Vietnam, Philippines) and Europe (Germany and the UK). However, its European operations were harder hit during Covid-19. This resulted in large impairment losses of intangible assets – particularly in its ‘Metric UK’ operations over the 18 months to June 2019 (latest available results).
The company reported TTM sales of $348m (FY20: $372m), ebitda of $46m (FY20: $45m), and net profits of $14m (FY20: $16m). Average free cash flows, which exclude the impact of impairment losses, averaged $21m since 2016.
The company operates with substantial net cash of $69m. It reported net current assets of $117m and book equity of $210m.
The stock is currently selling for $89m – at a 24% discount to liquidation value and at just over 4x average free cash flows.
Recent dividend payouts were just under $4m, which yields 4.5% at market – but appears inadequate in relation to the large net cash balance. Management asserts that such balances are required for operations and helps it win important contracts. Further, 44% of cash balances are in Chinese Renminbi, which isn’t freely convertible.
Though the company’s main business (HSS) faces significant long-term headwinds, it still holds a prominent position in its industry with several major customers, and generates substantial free cash flows. Therefore, in our view, the stock appears to be undervalued with respect to the company’s financial position and performance.