In the recent past shares of Dankotuwa has become very popular and also recorded remarkable appreciation of price. This is due to the fact the company has decided to accept by way of private placement capital infusion of Rs. 433 million from Environmental Resources PLC and Ceylon Leather Products PLC resulting in the additional issue of 42,163,000 shares at a price of Rs. 9.
The company lacked financial resources in the past for a turnaround and the proposed infusion of funds would be utilized for the following purposes.
(01)Modernisation of machinery including fuel efficient Kiln which is costly.
(02)Expansion of capacity.
(03)Retirement of some debts.
The Environmental Resources Investment PLC has competent staff and management skill in the rehabilitation of sick companies as evident from the success of Ceylon Leather Production PLC and naturally entry of ERI has been greeted with substantial increase of Dankotuwa share price.
Prior to the proposed entry of ERI the company entered into MOU with 2 major unions for wage freeze for 3 years which was a major obstacle in the turnround of the company. It should be recorded the government made a major contribution in this regard and should be commended.
The company has recorded appreciable net profits during 5 year period except for 2001 where the losses are insignificant as follows:
It is interesting to note the company has performed well without the benefit of GSP concession the proposed withdrawal which has been blown out of context by the opposition parties and few governments in the western world. The central bank has estimated the loss around US Dollars 100 which could be managed.
The Dankotuwa has the distinction in introducing an internationally accepted brand name with products of highest quality compared to best in the world. 80% of products which are exported to countries such as EU, USA, Japan, and India are available at prestigious department stores eg. Macy’s , BHs, ELCORTE Ingles, Iselan migres Jasanmal. There are only a handful of such products with Sri Lankan brand name internationally accepted.
Salient Factors of Restructuring
(01)With the replacement of some machinery which are over 25 years old, inefficient and costly to operate would be replaced. This Would reduce unit cost and increase production. It is relevant to mention Kiln purchased a few years back under a different management proved to be unsuitable and has been written off. This exercise contributed to a substantial loss of Rs. 400M recorded for financial year 2006. Interestingly company recorded a small profit in the following year 2007.
(02)ERI is bullish on the prospect of turnround of the company despite prospect of losing GSP concession. This is evident from the fact provision has been made for the expansion of the capacity with the infusion of capital. The proposed expansion would ensure higher turnover and increase competitiveness.
(03)The retirement of some debt with zero cost funds would reduce the finance cost.
(04)The MOU signed would ensure cost of wages at manageable level for next 3 years.
The writer is of the opinion based on prospects, due to entry of ERI price of Dankotuwa would justify a price range of Rs. 85 to 95 in the short term. The investors should remember the company ‘Implemented a drastic reduction of capital in the recent past where an investor who owned for instance 10,000/- shares now has only 5000/- shares. The investors should bear in mind offer price of Rs 9 is reasonable in relation to the book value of Rs. 10.50 as at 31, March 10. Investors should realize the present price of Dankotuwa is due to the proposed entry of ERI and would give substantial price benefit under ERI in the future. Investors would recall the writer predicted a price range of Rs. 150 to Rs, 175 for Ceylon Leather Products PLC when the price - traded at Rs. 54 in an article in English Newspapers on 30, January, 2009. There were sceptics as usual The price of CLPL ultimately rose to Rs. 268 far above writers estimate. Similarly investors and stock brokers should not be surprised if the price of Dankotuwa rise above Rs. 150 udder the management of ERI.
KAS Perera is a senior consultant in banking, finance, industrial projects, restructuring and investments. He is a retired Assistant General Manager of the Bank of Ceylon.
source - www.island.lk
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