DEMCO a genuine company visit.

PaulRen's picture
Company Visit


Below is my report to you based on a pleasant and amicable visit/dinner I had with DEMCO's seniors.  I like these guys, they are subdued,  professional and highly competent.   Are facts or genuine opinions bragging? Anyway, any viewed boasting here, is mine.  My strongest buy view and maximum DEMCO bullish continues!

I see bleu
   I think many Thai fund managers and other fundamental investors got this DEMCO story wrong and that is why the stock price remains too low.  I think they assume there is a lack of wind blowing risk building this mega green energy project (there is some but not “lots”) and because they say “nobody has done a project like this before”; and so they don’t believe it, until they see it.  By then DEMCO shares will likely be higher, perhaps much higher and the trade already profitable for months if not quarters.

 I try very hard in being objective and find what is wrong with my analysis, but I always come the same conclusion -and that is maximum DEMCO bullish.  The Thai culture has many positives but sometimes they just don't believe something unless they see it first hand.  I noticed this over the 21 years on location here.  It was the same with TICON when they did the first property fund.  So it goes, nobody ever build a large wind project here, so they don't believe it until they see it. Seeing is believing is the understatement, as pointed out before.  Never mind that Wind projects have been done very succesfully so in many countries, not least the most succesfull currently in China.

But by May '12 they will start seeing it,  as then the first mega turbines will go up and the whole project will move very fast.  In late June we can organize a member visit to the site and take a look at this impressive undertaking.   Lots of work went into the 90 foundations before the 100 meter tall wind turbines get lifted in one by one every day, this by mega cranes which cost 1 mill. Baht a day to rent. So it must move continuesly. (But this is SIEMENS’s job).

“Nobody ever do like this here before”
Never mind that in China huge wind projects have been successfully installed and globally there are some 64 Bill$ worth of wind energy, producing huge amounts of electric.  Many non-Thai’s also are hung up in that anything which requires some government support/subsidies is by its very nature not sustainable. They are simply wrong on that.

Because the Internet is just one example which received government support for decades before it took off.  Wind energy produces zero pollution and so reduced the carbon foot print, surely that is worth some government support. And if coal and gas fired power plants paid for the pollution they cause they would not be the competitive alternative so many think they still are.  Carbon Tax and carbon trading credits will in the future alleviate this “cost” and its estimated that their wind project will estimate reduce, 139,035 per year (tones in CO2 e). (Source is on page 5 of CDM executive Board, I have copy if you want.)

In some Western countries select wind/solar energy projects have been shelved of late, only due to the increase in electricity prices ever more green energy projects there will breed. This is because these are well ahead of Thailand and for some years already installed multiple projects. Hence every new project incrementally increases the price per electric watt.  Surely we are not there yet in Thailand -and so well behind on such concerns.

With this shortest introduction lets move right on and review what I learned last week with my solid and amicable visit with the 2 seniors there:

This Monday or Tuesday Feb 27/28,  DEMCO will report it 4Q.
Watch and see another superb earnings report.  Not sure if the company will just show the whole year, or the same Q. to Q. of last years’, comparison?  But anyway you slice or dice it, it will prove that the continuation of earnings explosion (which just started in the 3 Q) is well on track and continuing into this year -and next.  My estimate is for around 45-47 million Baht net operating profit, for the 4th Q. or some 133 million Baht for calendar year 2011. This would come to around 0.34 Baht per share.

I so expect the dividend to be around 0.13 per share this year because there are now 108 million new shares outstanding due to the just very successful Warrants #3 99.5% conversion.  All shareholders including the just newly converted warrants into shares will receive the dividend.  In August then, the company will likely pay an additional interim dividend -as they have in the past.  The interim dividend will likely be similar to the current one as 1st half and beyond, earnings are expected to keep soaring. La vie en bleu

Here is the DEMCO’s earnings history since 2008 and my projection for this and next year, look at these solid earnings progressions even while DEMCO’s stock price dropped by 30% since the end of year 2010.

Year 2008: 176 million Baht.
Year 2009: 50 million Baht. (global financial crisis)
Year 2010: 89 million Baht. (getting ready for wind project.)
Year 2011: 133 million Baht (my conservative estimate, 4Q. profit is to be reported by end of February '12).  

Year 2012: 280 million Baht (realistic estimate due to massive wind project now finally in full bloom).

Net profit for year 2013 is my projection at around 425-500 million. This, due to by then, the expected 200 million in expected annual tax free wind project dividends -besides 275-300 million in core profits on new wind and other core business projects. Or, close to 0.90 Baht per share in year 2013.   Assuming a p/e rating of only 10-12 DEMCO could well be trading around 8-10 Baht per share by next year.  Yet, note there are 74 million of warrants #4 still outstanding which will create some further 12% dilution.  Warrants #4 expire in Feb of 2013 at 5 Baht per share conversion price.  I expect DEMCO will become a very high dividend paying stock especially to us as we have the low average cost price.

Unlike expected before, DEMCO will very likely not need to raise its capital this year -and the dividend at 40% of net profit is secure.  Both very good news, as previously I feared a capital increase by mid year 2012 (due to large investment in the wind Aelous Co.) which would substantially dilute the earnings per share.  I am delighted to hear that the company has enough cash flow to complete its acquisition of 27% in the Aelous company, without the capital increase!

 The 4th Q. earnings announcement should show a near 1000% increase over last years same Q.  (see below).  Again, the company stated its dividend 40% payout ratio on net earnings per share is secure. This is good news as some had feared that due to their massive investment this year they may reduce on. dividends. This is not the case and this was just reaffirmed.

Wind blowing fears are just exagerated.

DEMCO extensively tested for wind speeds at 18 different land sites there and at 3 different heights for a long wind history and all in the same area. This went on for 3 years -and was all independently verified by outside consultants -before they proceeded!   Also, EGAT has already 2 large wind turbines in place at near the very same location and with a few years of history (sorry did not get the length of time, I think they said 3 years). This has shown first hand favourably wind energy production and at “higher then they [EGAT] initially expected”.  (EGAT stands for the Electric Authority of Thailand which produces all the electric power for the country.)

SIEMENS, the wind turbine supplier for this, will never supply such large turbines without such comprehensive and certified wind studies on hand, so its a bit silly to worry about “if the wind blows enough” -as fund manager and other investors seem to fear.  We know this for a fact, as others (like the Thai founder of Red Bull Energy one of the richest men in the country), tried to buy some of these same turbines separately, but this was turned down because he had no wind studies on hand.  SIEMENS will simply not supply wind turbines unless it knows and has wind studies evidence to back it up that these will be successful.  According the managing director of DEMCO, “the question of enough wind to make this viable is just not a risk factor”. 

“Thai Bank loan of the year award.
At the end of March ’12, DEMCO’s /AELOUS massive Thai wind project will win and be awarded the “Thai Bank consortium loan deal of the year" award, in Singapore and DEMCO will be there to receive some of the glory.

DEMCO remains the wind green energy great story in Thailand with earnings to continue to explode this year and next, especially so when they receive expected yearly 200 mill. Baht in tax free income derived from their 27% investment in this wind project, starting in calendar 2013 (AELOUS).  DEMCO was just successful in raising near 300 million Baht as 99.5% of all warrants #3 were converted as noted and so now there are over 560 million shares are outstanding.

Its important to note again that EGAT already has two large wind turbines there on that same location in the Nakon Ratchisima area which is producing above expectation wind powered electricity. Worthy repeating.  This is the same 27,000 RAI area, where DEMCO will install 170 megawatt of wind power this year.  Confirmed to be all completed by this year's end. (Phase one of two, is already 50% done).

At the end of year 2010, DEMCO’s stock price closed at 5.25 vs. now at 3.60, 
yet consider these facts:

Year 2010’s 4th Quarter earnings came in at only 0.01 Baht per share, but this last quarter earnings’ (4th Q of 2011), should come in very close to the previous strong quarter, or say 0.10 Baht per share, vs. 0.13 Baht per share for the Q3.   Hence the quarterly comparison could show an awesome 10 fold increase.  Impressive 4Q, ‘11 we will think, considering it was a terrible flooded Thailand late last year. The company stated that while it was not affected much by the floods beyond moving its headquarters for a few weeks, it could not get to many locations so to complete some jobs.  And yet, the 4Q. earnings will likely keep looking explosive, as compared to last years’.  

Further…bear with me:

DEMCO’s net profit for the first Q. of last year 2011, was 27.47 million Baht, this represented an increase of 65.38% from the net profit for the same 1st quarter of year 2010, which was16.61 million.  In my view the 1st Q of this year 2012 will show continued awesome improvement of around 47 million Baht, or yet another 82% on top of that. Yet its stock price has dropped some 30% during this high earnings progression.

Here are few other tit bits of information I was able to have confirmed:

-- The gross profit margin was re-affirmed on construction of this wind project -as expected, at 12%.
--  2-3 continued wind energy projects are secure going into year 2013, beyond the mega one this year, which will be completed by year end.  The 3.5 Baht adder rate is guaranteed for 10 years -as well the next couple of projects. Beyond that its not clear yet.
-- The company now employs 150 engineers, up from around 105 not even a couple of years ago.
-- The 3G Mobile phone 450 million steel tower project is good news for the company as this allows the steel fabrication plant to be higher utilized. (Remember SIEMENS does the 1OO m. steel poles for the wind project).
-- DEMCO will be hiring a new Investor Relations company (IR), by mid year to better portray the companies’ progress. (to date they have not done this as there is not much to be seen on location, other then some foundation work).
-- There will be a total of 90 seperate wind turbines installed on 27,000 Rai of land. The steel polls will be 100 meter in height and so will need a crane lifting 760 tons, to be employed. This will be done by SIEMENS, not DEMCO. The blades of the wind turbines are 50 meter wide. Wow.
-- Tapioca will be grown under the wind turbines so the land area is not lost for farming.
-- There is no risk of fire in wind turbines as one member has asked, as unlike others, (Vestas wind turbines) the generators will not be housed in the fuselage, but on the ground.
-- The company expects carbon credits to be generated by this project but has not incorporated any of these in any projections to the banks or otherwise, neither have I.

So here you have it, dear members, I have gone all out on this one and am exhausted now, as I know it’s a very important stock for us!  In late June we should organize a gathering to go see it all happening.

Best Regards,
Paul Renaud. 

PS.  Blue is the color of winnings, that is what I see with DEMCO and this Napoleaon Fish represents it perfectly.  This noble fish can get up to 200 kilos in weight, and to me represents "la vie en bleu".