Demco, the upate. The light at the end of the tunnel.

PaulRen's picture
Company Visit

A solid DEMCO dinner with re-affirmation on the ending of their "black swan" set back.  This choice having little correlation with anemic Thai economic recovery and so is a good portfolio fit.

By mid July the final 26 foundation repairs will start and to end in mid November. There is very high incentive by DEMCO and to WEH to get it finished as there is a tax liab. incurred to WEH on the downtime they get it  paid by DEMCO. (In accounting this compensation shows up to WEH as "other income", not BOI approved Wind energy).

The starting date on this last set of repairs is now the next good news. Remember these last 26 appear more easy to do as they are on less tall towers. The foundation repairs where suspended due to the ALRO fiasco land checking set back. As was amply in the news and I here reported last February. This was the only reason for the delay in getting it all done by now. However it did not cost DEMCO more downtime reimbursement because this (ALRO fiasco) was not their fault.

WEH must approve the re-start up date as it's the majority shareholder. Its very unlikely to get delayed due to some new major hang ups, as the company already completed  at much time and expense the more difficult higher tower group.  The seasonal wind starts blowing in full again by mid November and so its critical to get them up by then.
Of course any set back in this is still a short term risk -but to me it looks negligible.

Investors in DEMCO now have to look forward to its great recovery in 2018 -and not be hung up on the past. Profit margins looks set to go back up and while wind energy may be taming down in years to come, new others like batteries' is the next boom to come. Wind energy farms will peak in a couple of years as there is not enough land.

The construction starting date clarity is what the market now needs before its stock price resumes its uptrend and to me it looks imminent. Same as it did earlier this year before the ALRO land issue news from nowhere.  I back then firmly predicted this would be resolved soon -and as I have now seen evidence on this being now totally settled.  Both parties have strong financial incentive to finalize this last sunk coast.  DEMCO already booked 128 mill. Baht and expensed this last year, but it may not be enough to cover all.  But its close to it, as I was told.

Demco stock price should soon move back to where it was earlier this year, around 8-9 I think and assuming SET does not tank. The stock price should further move up when upon completion of these by mid November. Then, its stock price should further increase as its apparent next year will the "full glory".

Again, my sense the market is only awaiting the start-up construction day announcement and I think is imminent. The company is excited next year on a variety of issues including the new biz of doing lithium battery installments, in time a huge new business.  Latest technology lithium battery capacity is the bottle-neck in much of further success of renewable energy. As there is a critical need for energy storage when wind and solar produce electricity in off peak periods. (Like night time or weekends).  Listed company EA for example has announced huge investments in such...this new sun up industry requires lots of land, the technology is on hand. its happening.. and installation of those will be the next new big biz.

DEMCO's core biz. is strong besides their new steel fabrication shop is doing well which is a higher margin product into this year vs. last. Its backlog log is solid at 4.5 Bill. and the profit margin should increase as last year was lower profit margin revenue and their steel fabrication shop is higher. The company still much believes it can do 2 of WEH's big wind energy projects.

DEMCO, I think should have a golden year in 2018 and its stock price will start reflecting this renewal from here on to then, with 15 Baht per share reasonable later next year. Call it my 12-18 month prediction. As by then WEH will be listing its IPO as I hear. With much fanfare (Demco owns 4.9%) around that it will be time to see fruition to our patience and in time yes, take profits.

In the meantime there are no dividends for this year and the next 3 quarters still has earnings/loss uncertainty, as the company tabulates the downtime compensation which has not yet been factored in to date.  But the point is its coming to the end and stock markets are forward looking DEMCO is no micro-cap and has multitude of institutional investors besides broker research coverage following. The stock can trade in big volumes when its on the rise.  For now its been washed out in the mid 6's and re-deserves the strong buy rating.  If I was not running out of time in the current model, I would double the weighting again into 2018.

DEMCO renewal is not dependent on the Thai economy getting better or exports increasing or tourism etc.  This company has its own momentum and risks going forward -which have so little to do with consumer spending or awaiting the Thai econ. recovery.  The past 2 1/2 years have seen a boring SET with the index today below compared to back then, and many stocks looking back it was not so unwise to patient' it out on DEMCO which now sees the end of its troubles and so stock price. All due to next year looking very promising.  That is, assuming its now happening which I do with full conviction...along the way liking the attraction of this choice having little correlation with the macro Thai picture as noted above.

Best Regards,
Paul A. Renaud.