DEMCO, remain bullish.
DEMCO's likely participatoin in the Billions of Baht Wind Project, looks good and ever closer.
On Friday May 13th DEMCO announced a 2 for 1 capital increase as was posted at its web site and to the Stock Exchange of Thailand. The purpose of this capital increase is in getting ready for the huge wind project the company remains convinced it will be part of -and as I have been reporting here for some time. I remain very DEMCO bullish.
After some understandable delays, the company remains convinced it will proceed with this. Post attending the EuroConference in Bangkok March I today understand why such a project can have delays. But those delays are now ending in my view. This wind project (Thailand’s first and by far largest) being worth many billion of Baht will require some substantial resources and the company needs to get in gear toward this. It will so now also become a co developer of renewable energy projects.
The company will use this capital increase, along with its treasury shares and other cash on hand from warrant conversions to purchase an 27% interest in Aeolus, as they stated:
“The meeting of Board of Directors (Extraordinary Meeting) of Demco Public Company Limited (the Company) No. 4/2011 held on 13 May 2011 (the Board Meeting) approved the investment by the Company in Aeolus Power Co., Ltd. (Aeolus) by subscribing for 35,135,135 new ordinary shares to be issued by Aeolus which are equal to 27 % of its registered capital”
As of 30 March 2011, Aeolus has registered capital of Baht 420,000,000,
divided into 42,000,000 shares with the par value of Baht 10 each. The
list of shareholders as of 30 March 2011 are as follows:
1. Mr. Nopporn Suppaphipat 0.00
2. Ms. Sujitra Sanrum 0.00
3. Ms. Wannisa Peungwat 0.00
4. Wind Energy Holdings Co., Ltd. 100
Demco mentioned some time ago that its aim now will not only be the contractor but an investor directly in alternative energy projects. This seems to be the first step to be co-owner of the huge wind projects along with 2 huge partners of RATCH, a large local utility company and CHUBU of Japan (a huge utility company there) they are yet un-amed partners in this whole venture, which I believe is very likely to take off. An announcement should be imminent until then these 2 huge utilities are not named.
I am told both of these companies have already given board of director approval. RATCH is all over the internet news searching by their name, stating it will invest in Wind Projects. CHUBU has already made some previous green investments in Thailand. You can see CHUBU web site at this link: http://www.chuden.co.jp/english/
If/when the massive wind project proceeds, my current earnings estimate of say 350 million in the year it takes hold look too conservative! Of course this has been delayed some months now, so my estimates are for the year in which the wind project takes off, again which I think is imminent. The company has made it very clear that it will only proceed with this 2 for 1 capital increase (probably around 2 Baht per new share) just announced, if the wind energy project takes off! The capital increase will of course increase outstanding shares and so create more dilution beyond the last 4 issued warrants. The some total 460 mill shares outstanding (including all warrants) will so double shares outstanding to close to around 920 million. But I was told on the phone that due to the new structure the expected net profit margin would now likely be closer to 20%, also at that point DEMCO would become a much bigger company, say closer to 120 million US$ of market cap., so it will command a higher p/e ratio.
Some of you have asked about now raising money to pay for this capital increase which timing and price per new share is still uncertain (awaiting the wind energy contract signing). If/when DEMCO announces to the SET that it obtained this large contract (& deposits will be made) the stock price will be firmed up. I then then expect the stock price to rock up as its clear DEMCO will be the prominent firm on this in Thailand and receive billions of revenues on that over the next few years. It is on this news and the very likely stock price increase some members can sell out some shares then gradually, only so to pay for the capital increase. There is no need at all to raise capital on this now as its not been announced and will not happened (capital increase) if they don’t get it.
I think the latest announcements are good news in that it confirms the company is confident it will (finally) get this huge contract and will proceed as was stated all along. The dates for the rights offering have been set and payment for the new company starts in late June, so its imminent. As Demco could have also announced this rights offering, with no dates given. The company so now would become a co-developer in this project at higher profit margins and with an equity interest.
Imagine you are an institution which seeks some green energy projects/stocks to get exposure in Thailand. You have a problem buying DEMCO as the market cap. is below 100 million US$. Its just too small and if you start buying now you move the stock price up rapidly. Instead you await the confirmed announcement that DEMCO got this huge wind contract and then subscribe to the new shares. You so can get your teeth into a substantial stock position without bidding all day long to accumulate, now knowing where the stock price may rocket up to.
The land issue is not a problem, the bank loans are not a problem the regulatory and permits are not a problem, all as was confirmed to me by the company.
See again my recent article on all this at this link:
Also key insiders own allot of DEMCO shares as shown below, our interests are so aligned with the key owners of DEMCO.
K.Pradej KITTI-ITSARANON a Director and Founder and his Family own a total of 13.43 DEMCO outstanding shares. This is significant as K. Pradej has been the key man in doing all the work over the past 2 years on this Wind project. And Mrs. PRAPHEE PUIPUNTHAVONG, President and Family own 24.42% of DEMCO outstanding shares. This all according to SET as of April 24 2011. And according to the THAI SEC there has not been any insider buying or selling of DEMCO shares this year.
I remain of the strong buy view here and while we must know there are always risks and never any guarantees. I am firmly saying today hang on to DEMCO or view buying more if you are underexposed. More speculative driven investors may want to accumulate the Demco Warrants #3 (2.08), say below 2 Baht, as these will be adjusted when/if there is the capital increase (Warrant’s Anti Dillution clause.) Their conversion price is 2.69 a share per warrant unit and expiring 10/02/2012, but the conversion price should be adjusted if there is a capital increase. The Warrants #4 (1.22) appear a bit too expensive for me, but this could signal the market is confident DEMCO shares are worth well more then 5, as I also think.
Paul A. Renaud.