K. A. S. Perera
An independent report released October 11 authored by the Merchant Bank Sri Lanka PLC regarding the mandatory offer of Dankotuwa Porcelain at Rs 9 says the said price is not attractive since it is at a discount to the weighted average market price of Rs 66.60 and Rs 66.65 based under different methods.
The Merchant Bank also notes it is at a discount to the net asset value per share and the price prevalent on October 5 at Rs 61.70.
It further says the observation has been based on historical performance and the market price.
The Merchant Bank has not carried out any analysis of the future performance due to the limitation on information to make projections.
The Merchant Bank has not revealed what the limitation of information is considering the fact investors are more keen to know the impact on the company’s performance after the infusion of massive capital.
The Dankotuwa PLC accordingly should officially announce the reason for this limitation which the investor public is entitled to know. Dankotuwa Porcelain which recorded satisfactory growth upto 2004 without GSP has thereafter shown negative growth upto 2009 except 2007 with an insignificant growth.
It is a fact that Environmental Resources Investment PLC has performed a due diligence exercise earlier and was prepared to invest in the company provided the company entered into an agreement with the Labour Union for the next three years.
This was signed due to the intervention of the President with the intention of reviving an important basic industry employing nearly 1,400 employees producing the tableware matching the best in the world. The company entered into an agreement with the Unions valid for three years regarding wages which could control the labour cost.
It is observed the wages structure was high in comparison to Noritake manufacturing similar products.
With the infusion of substantial capital of Rs 433 million the company will be in a position to meet the working capital requirement fully.
This would enable near capacity utilization which would reduce the unit cost.
This would also enable the company to purchase raw materials at the correct time and supply products without any delay.
It is expected during the current quarter the company may near full capacity utilization.
The company has been affected by the recession in 2008 and 2009 period and with the revival of the economy this obstacle has been removed. In the earlier report a mention has been made that the factory had 60 percent capacity utilization.
Independent reports confirm production of 9,695,000 pieces in 2009 compared to 14,886,000 pieces for 2006 which means production even compared to 2006 was 65 percent. If the 2006 production is 90 percent of capacity 2009 production is below the 60 percent.
This shows area for improvement re production. Independent report indicates 75,000 pieces as monthly capacity (annually 9m when production for number of years exceed full capacity. DPL should clarify this position.
It is expected the company under ERI would improve management quality. The writer in the earlier article mentioned the possibility of modest profit to be made for the last quarter and according to a press statement in the weekend newspaper on October 10. The Chairman confirms improved performance for the said quarter. Whether this refers to a substantial reduction in loss or making profits would be seen shortly when the company officially releases the report for the September quarter.
The writer is confident the company would record a profit for September despite the fact ERI managed the company only for one month in September. The writer does not have access to the budgeted performance for the current quarter.
However it is expected the company to show good profits since the entire period would be under ERI and would benefit from massive infusion of capital amounting to Rs 433 million. Considering the fact the company incurred Rs 32 million loss for the first half it would be interesting to note whether the company could record even a modest profit for the financial year 2010 by recording a profit above Rs 32 million in the second half.
The private placement document indicates among other purposes retiring of some debts, expansion from the new capital and meeting the working captial requirement which would ensure higher profitability and the writer expects better performance during financial year 2011 which may be highest for the past ten years.
The writer is of the opinion if substantial portion of the new capital is utilized for retiring of some debt, meeting working capital requirement and improvements to existing machinery and purchase balance new factories for energy savings for short term benefit the company may postpone purchase of expensive kiln and capacity expansion later where there is a possibility of right issue with warrants, subject to limitation of the SEC.
The degree of expansion would depend on the proper assessment made after reaching near capacity utilization which is one of the declared objectives of the company.
source - www.dailynews.lk
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