DEMCO, a summary what happened and looking forward.

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DEMCO, a summary what happened and why I view this stock investor favorably at the current price below 7.

Here I summarize for all in some detail the key issues with DEMCO (6.75) so to have an understanding what happened to this falling star, which I firmly predict will be back and to explain why at this low price below 7 its well worth to consider as an investment with a 12-18 month time frame.

I know the seniors there for many years and believe what they say, as they never in the past mislead me. I explain everything very clearly all along at this leading web site to all contributing members, so only have time here to give a brief review.  I have followed DEMCO full time since 2012 when the stock price back then was around 3.50 Baht.

When DEMCO built the 80 foundations of its first Wind farm (in Thailand) it employed a consulting engineer which Siemens suggested to them.  It then questioned the PhD engineer senior-partner heavily but was at last told in a near arrogant way they "we know what we are doing" -and DEMCO you should just listen.  Having no experience in building mega wind mill foundations of over 300 feet tall towers (very different then a tall buildings due to swing factor) it had to rely on this outside top-notch engineering consulting firm.  Again, the consulting firm was adamant almost obnoxious that they had the foundation engineering right.

Bref, 3 years later they were alerted to some cracks emerging on these foundations...based on long assessment and re-evaluation, bref Demco agreed at great cost to redo all these foundations as its reputation on getting many other large wind energy and other green energy jobs depend on them not quarreling on this.  It was clearly a one time "black swan event", out of nowhere....and not totally DEMCO's fault;  yet they decided as a listed company to take full responsibility.

The company expensed 500 mill. Baht to redo all these faulty foundations, all expensed out in 2015 and hence behind them.  It's a one time thing (!) as all other foundations since have huge 1 mill. EU insurance on them -and were done correctly, so this cannot happen again.  

The company so took a huge earnings hit on this and again, expensed all this into last year, so showed a 0.70 Baht loss, per share. This along with the very fragile stock market back then took this stock by surprise and most Thai's being the ever fickle short term traders all dumped the stock.

I am told by the company again and again this is a one time horror and they already have expensed all the repair (remedial) work into last year. To get it over with. However the company is responsible to also pay for the downtime on producing electricity so the first Q. and the 3Q. will show some losses again.  By late October it will all be over with!  Yet, Q2 should be OK as the wind blows at the lowest of the year in that period. This was been very well explained since and the reason why the stock has not yet recovered...along with lots of misinformation.

Yes, the consulting firm is being sued now by DEMCO and they will win -but the maximum (10 mill. BAht) is far shy of what it takes to repair all this. 
Again, there will be some wind blowing downtime DEMCO will also have to pay in Q1 and Q3,  but April to early June is the lowest wind blowing season.  By October all will be done and over with the company assures us!   Its a one time hit and DEMCO has gained much credibility by taking full responsibility to the owner of these wind-farms, which by the way DEMCO itself owns some 20%  which is producing 170 mill of tax free gains a year. 

The other thing not mentioned by analyst and why I remain upbeat is that DEMCO is sitting on a huge unrealized gains on their 4% ownership in Wind Energy Holding (WEH), the biggest green energy private company here in S.Asia and to be listed on the Stock exchange by early next year.  Its odd how the local brokerage reports don't point this out?,  no doubt they are just too focused on the one time horror and being so short term oriented fail to appreciate these hidden assets, which I estimate are worth 1  Bill. Baht of unrealized gains to this company. 

When DEMCO sells its stake in next year's IPO of WEH, it will realize these gains, all tax free.  The gains on this is well more than the loss on their mishap.
At the price of below 7 Baht,  I strongly view accumulate buying but realize we will have to be further patient as we don't know when this stock wakes-up again.  The Thai market index up 8% this year and so recovery of late...vs. most EU stock markets have made nor, negative or little progress this year.

As this problem is solved the company will resume it strong earnings growth and so currently is trading at a 2017 p/e of 6,  far too cheap!  The company has 8.2 Bill Baht in signed backlogs on hand so its virtually assured to be profitable next year and beyond...and the green energy industry is and remains in full bloom here, regardless of the drop in oil prices.  Thailand is the regional leader in green energy (mostly Wind,Solar and biomass), but this is never really reported in the Thai nor Western press.

The company has been very forthright and open explaining it all  in their official news releases.  You can see these here:

I am sorry for this temp. mishap to investors which some invested in the stock in the low teens...this problem came out-of-nowhere and yet was disclosed to all, at once, in a very professional way late last year.  The stock price actually went-up the day before the bad news release last November.  So there was no insider selling before!  I view this company positive at this low price, which should see its stock price rock up within a year. Hence at the current low price of below 7, I rate it a strong buy with the caveat to have a holding period of 12-18 months.  IF this stock drops a bit temporarily in mid April as they report their results, I would view as a screaming buy.

All over the world there are set backs and "black swan evens", even Apple computer is down some 25% since I was in the US a year ago, all on their faulty premise that high growth would just continue.  Or look at Volkswagen, not only did it take an earnings hit but this on fraudulent practices.  Lately, in the US a major drug company lost 80% of its value on similar horror.

The point is that DEMCO has a one time horror on this, it was not on bad mgt. or criminal or insider selling nor has anything positive changed once they get over this, by this 3Q.  Usually markets are forward looking and its why I think at some point soon the stock should start to rise again as they can see its getting behind them and there are no repercussions on it into the future, just the opposite as the company has gained much credibility on addressing in full the issue, evenwhile its not totally their fault.  Also, DEMCO has stated it may sell a portion of their WEH before the IPO next year which would very likely move the stock up. 

Its all about "buy low and sell high" and at this point my strong opinion is DEMCO stock is likely oversold having lost more than half its value, on this one time event which is 2/3 over.  Its a little bit like a good property where for some reason the high season was not rented out, yet still is very viable.  Surely this does not mean the property should lose half its market value.

Best Regards,

Paul Renaud.


PS.  MayBank/KimEng analyst has an excellent report on DEMCO released last week, this analyst has covered the company for some years.