Dramatic turnround for Dankotuwa

K A S Perera

The Dankotuwa Porcelain PLC which experienced financial constraints in the recent past has finally come under Environmental Resources Investment PLC on September 2. In an announcement made to the Colombo Stock Exchange on September 3, two directors have been initially appointed namely Dr Kosala Heengama and Gregory Scott Newsome.

Other members are a former Central Bank Governor, a former top CAS official and a career diplomat.

Apart from use of outdated and fuel inefficient machinery another major constraint of the company has been the inability to procure raw materials due to suspension of bank advances. Accordingly the company has been operating at 60 percent of the capacity. The immediate target therefore would be to attain full capacity. Under the second stage it is proposed to enhance capacity.

With the infusion of substantial capital of Rs 433 million the company would easily meet the raw material requirements in time and also would gain by purchasing at the appropriate time.

It should be noted specially the purchase of modern and fuel efficient kiln would involve long period from the decision making process, fabrication and final installation.

Consequently apart from meeting working capital requirement the company would be in a position to repay the entire debt amounting to Rs 245 million as per financial statement ending June 30, 2010. The company may as an alternative repay only high cost facilities such as overdraft amounting to Rs 77M as per balance sheet of June 30, 10.

The company may also divert some funds for repair of some existing machinery for greater efficiency.

The Environment Resources Investment PLC although officially acquired Dankotuwa on September 2 has been involved with the company earlier in marketing specially in EU and Asia and 17 percent increase in turnover during last quarter ending June 30 may be due this effort. Ceylon Leather Products PLC which was on the verge of bankruptcy and transferred to default list for the non payment of around Rs 175,000 to CSE today is a holding company with an annualized earnings per share of Rs 7.28 based on June 10 financial results.

It is the management quality as seen above with innovation and substantial financial resources that made the huge difference. This has been achieved with the same staff and the managing director.

Today it is the envy of many blue chip companies and for instance warrants issued by them are immensely popular so much so another company recently has declared rights with attached warrants.

It would be interesting for the investors and prospective investors to note that Dankotuwa is likely to record a modest net profit during the current quarter and significant increase in profits for the next quarter ending December 2010. Being a December company it is expected near 100 percent capacity during entire next financial year 2011 with a substantial net profits perhaps highest for past 10 years.

The company may evaluate the extent of increase in capacity required after reaching 100 percent capacity and if the performance justify a substantial increase the company either may obtain financial backing from ERI or a resort as in the case of CLPL for a right issue with attached warrants. The investors of ERI should note that the Dankotuwa has been purchased at Rs 9 per share and how the net assets value of ERI would gain with the price increase of DPL is indicated below.

It should be noted by those connected to the stock market including stock brokers, investors and writers that restructuring and rehabilitation of an industry is more complicated than a similar exercise in other sick companies.

It requires special skills with regard to production process, product mix, efficient layout, procurement of materials in time and modern machinery. Proper implementation of remedial measures would ensure a profitable industry as would be seen in Dankotuwa PLC under ERI efficient management.

Certain adverse comments made in the recent past could be attributed to sheer ignorance of a specialized subject. In an earlier article the writer has justified a price range of Rs 85 to 95 for Dankotuwa with the expectation of a turnround only next financial year.

Due to the new development where the turnround may take place from the current quarter the price range has been revised upwards to Rs 95 to 105.

Similarly considering the expected substantial turnround next financial year partly based on fundamentals, sentiment attached to Dankotuwa, ERI and also bullish sentiment of the stock market expected to be extended to year 2011, the writer expects a price range of Rs 165 to 180 in the medium term.

The bullish sentiment is such The Finance with a frightening loss of Rs 2154 million (EPS minus Rs 105) as of 30.12.09 and worst net assets value per share in the stock market at minus (Rs 33) was heavily traded recently ultimately rising to Rs 65 on September 3, 2010. It is more frightening to note Rs 26 billion in public deposits with investors not permitted to withdraw.