DEMCO's disappointing 2 Q.

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DEMCO's disappointing 2Q earnings report released yesterday.

The primary reason for the shortfall is the lack of expected revenues from the 3G new telecom towers. With no notice, 3G operators seem to have suddenly opted to upgrade existing facilities, rather than build new ones -as was much expected to start in Q2.  Hence their steel fabrication shop was way underutilized, even while its making frames for the solar industry.   

This is the so often the norm here where massive new investments for the future seem perpetually delayed or even bypassed so to save on capital budget expenditures  (call this stingy).  To me it does not speak well for the telecom companies/industry here which after years of delays and bickering on all this, now seem to think they can just keep cruising with bandage upgrades, when actually new tower investments makes far more sense for the long run.  I believe this was a total surprise and that what DEMCO tells me is truthful in that they did not know.  

Let’s see how the other brokers whom cover DEMCO shortly report on this.  Feel free to share any info. some any of you may have.

DEMCO's total expected revenues for this year has hence been scaled back to 6 Bill. from the before expected 7 Bill.  Next year is now projected at 7 Bill.  

For the first half '13, DEMCO reported some 2 Bill. in revenues,  hence the second half will see a nice catch-up of double, as compared to first half. I was clearly told the second half will be twice as good as the first and that telcom towers will now likely be built in Myanmar next year, where DEMCO has the good chance of doing that mega job.  (Telenor to build many towers in Myanmar).  So its not a total loss, as  3 G telecom towers command nice profits margins above the average and this firm has a very competitive position in this.

The backlog is confirmed at 5.5 bill. Baht, of which 4 bill will be recognized this year, hence the big catch up expected.   Next year looks very solid as the new GE wind energy turbines along with 120 meter tall towers (the last projects was 100 meters) "will generate 25-30% more efficiency".  Also EGAT and PEA (Thai electric authorities) plan huge transmission line and other capital expenditures of 30 Bill Baht over the next 3 years -and as a main contender DEMCO will reap good benefit from all this.  This is the good news lately as before these massive expenditures were not announced.

The next wind project is delayed by a couple of months but will still take off this year!  The reason for the short delay is only due to Bank financing closing agreements in the making, not engineering or any others. Next year still looks like full steam ahead with the IPO very likely later in the year. The reason they think this is so is because WEH is taking clear steps (like new accounting firm) to gear up to this.

I also note how GUNKUL (DEMCO’s only real competition) also reported a bad if not terrible quarter, of only 14.2 mill. vs. 119.7 mill. for the year before, for the same Q.

DEMCO’s  0.05 Baht interim dividend so represents more than 40% of its earnings for the 1st 6 months. Why, I asked?   "The board has decided this so to send a clear message that 2nd half earnings will be far stronger, due to revenues doubling vs. 1st half".

As long term investors I view the set back as yet another strong buying opportunity below 9 as while this is a shot term disappointment,  the rest of the year looks “solid up” and next year even more so.  As always all member comments welcome.

Best Regards,

Paul A. Renaud.