Demco, the annual report.

Vivian Lewis, ed.
www.Global-Investing.com

I just reviewed DEMCO’s 200 page impressive annual report 2011, as published a few days ago just in time before their annual meeting next week.  We hope to get some feedback from their annual shareholder’s meeting by one of our members which will send his Thai personal assistant there. 

It’s a comprehensive AR full of wind mill pictures and graphics. As if to make the clear statement that this is the company’s successful focus forward -and indeed it is. The material statements and accounting are in English but the introduction discussion and ratio analyses are in Thai language. 

Here are some of my key points, post a critical review, after looking through it all on a rainy day here before I am taking a deserved brake. All is in place now for DEMCO to start getting the investor attention it deserves.

Doubtful debts decreased from 3.3 mill. Baht in 2010, to 2.35 mill. last year, hardly worth mentioning. But, on page 144, it shows trade accounts receivables of 530 mill. vs. 196 mill., the year before.  Some 2/3 of these are shown there as “not yet due” and none are show as “allowance for doubtful debt”.   In an entry further down, it does show “less allowance for doubtful debts”, decreasing from 15.3 mill to 7 mill over the past 2 years.  (See page 110).  I think all this give us evidence that this is just not an issue as some journalist reported.

The entry “Unbilled installments on completed work –net” shows an increase from some 827 mill to 1.38 Bill.  But this was well explained here before and on their “SET Opportunity Day” presentation in early March ’12. (see more on this below).  This is not a concern as the company clarified on a number of occasions.  DEMCO does not have any unpaid debts or unpaid owned bills -or other any problems from the Thai floods or otherwise!  (see below).   On page 172, the company reaffirms that it “does not expect to incur material financial loss” regarding doubtful debts.  A journalist whom worried otherwise are misreporting this to their own disadvantage.

DEMCO will later this year own fully 27% in the non-listed company (Aelous). And, as was in the Nation newspaper of April 9, their parent company wants to bring the whole wind project public (listed on the SET) by year 2014, which then would likely generate a huge windfall profit for DEMCO. 

--You can see the details of their Aelous investment on page 147 of the annual report (English).  As of year end 2011, DEMCO already owns 14.96% of Aelous and has stated it would not need a capital increase to complete the purchase the balance, set for completion in the 5-6 months, or before the completion of finishing building this mega wind project.
 
DEMCO reported a start-up impairment in this associate company (Aelous) of 11.4 mill Baht in 4Q of 2011, but has stated at the last “SET Opportunity day” (and to me in person) that there are no further impairments coming.

DEMCO has stated and reaffirmed again that they expect some 200 mill. Baht tax free in annual dividends starting next year –just from these 2 first phases wind project ownership.  There are many more in the pipeline after post these 2, as is explained in this Nation newspaper article of April 9th. 

DEMCO has a stated policy of paying out 40% of net profit in dividends and for this reason we see a very high likelihood of surging dividends to shareholders over the next few years.  This is the core reason why the stock should be moving up anytime.  I expect on the current market price of the stock, dividends to be near a double digit % number, starting in 2013.

---Profitability is soaring from late last and into this year, as we note, and this will continue as DEMCO is "the balance of plant manager" of these massive projects, besides general contractor. With the help of mega SIEMENS, which will start erecting the 90, 100 meter tall wind towers, starting early next month.  “The plant is 30 per cent complete and scheduled to start providing electricity this year”.  From: Nation Newspaper April 9 2012.

DEMCO’s dividend was also just increased by over 50% from 0.05 Baht per share last year to 0.08 Baht for this year. This is an interim dividend, as DEMCO has a history of paying dividends twice a year.  Last August the company paid a 0.035 Baht interim dividend for the second half -and I can see this amount doubling or more this year.

---The company's accounts receivables is increasing due to DEMCO becoming a much bigger company now, along with soaring revenues which management has reaffirmed "will be at least 5 Bill this year 2012"; or another 55% revenue increase from last years high point.  Since revenues are exploding one can of course expect accounts receivables to also increase, this just makes common business sense.  

DEMCO’s  net profit margin will be at least 5% this year, part because corporate taxes on SET listed companies have been decreased from 27% to 23% in 2012.  Hence, this company's' net profit will/should double and even more this year. The net profit margin and expected revenues for 2012 was clearly projected with conviction by senior management a couple of occasions of late.

---The companies' backlog remains at a record 9 Billion Baht.  Near double the amount of a year ago.

With the mega Wind towers being erected/installed starting in May, at least 2 per week, and start connected to the grid starting in July (as the company told me by phone), I think the story will start tracking attention very soon.  Again, the company reaffirms its all on time.  I will organize a visit in person with members of all this in mid/late July.

As reported, just about 100% of the warrants #3 were converted last February, showing the confidence of the 40% majority shareholders group, which converted 100%.  Also, there has been some (smaller) insider buying of DEMCO shares -and Warrants #4, of late.  Insiders already own over 40% of the outstanding shares.

Post just looking at DEMCO’s impressive annual report I hope this helps all members/followers with more facts and reaffirmations -as I remain of the strong investor buy view on DEMCO (3.66). I have not seen anything else in there which caught my attention or concern or is different then my good understanding of this favorite.