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Author: PublicInvest   |   Latest post: Fri, 24 Jan 2020, 2:52 PM

 

DKSH Holdings (M) Berhad - Earnings Affected by Weaker Margin

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DKSH Holdings (M) Berhad (DKSH) reported a 4QFY18 net profit of RM10.6m, -32.7% YoY due to margin squeeze at the marketing & distribution segment. DKSH managed to deliver the highest revenue in recent years, reaching the RM6bn mark (+9.1% YoY). However, thinning margin has affected DKSH’s profits, leading to a 32% drop in 4QFY18 net profit. We cut our earnings forecasts for FY19-20F by 11-13% to adjust for the lower margins in marketing & distribution segment and higher interest cost. As we trimmed our earnings forecast, we cut our TP from RM3.00 to RM2.75, based on a 9x FY19F. Since our upgrade on 24th December 2018, DKSH’s share price has risen by 21%. Given a weak underlying performance of its marketing & distribution segment while Auric’s acquisition is not likely to be earnings accretion in the near term, we downgrade DKSH to NEUTRAL.

  • 4QFY18 revenue grew by 16.1% YoY to RM1.60bn. Growth in revenue was mainly due to the organic growth in all segments. Marketing & distribution segment recorded a 12.5% growth YoY while the logistics segment managed to deliver a growth of 19.3% YoY. However, on a QoQ basis, the marketing & distribution segment had a weaker growth (-1.3%) mainly due to a slowdown in consumer spending following the implementation of Sales and Services Tax. The logistics segment recorded a growth of 11.1% QoQ, in line with the increase in revenue for the segment as it is not affected by seasonality.
  • 4QFY18 operating profit fell 28% YoY. Despite recording higher margin in Logistic services segment, (1.63% vs 1.16%) the group’s operating profit was dragged by the huge drop in marketing & distribution margin (0.27% vs 2.23%). The decline in margin of the marketing & distribution segment was due to the commencement of growth and efficiency improvement project plus a one-off expense for a provision of doubtful debt. The Other segment posted an operating gain of RM0.5mil.
  • Acquisition of Auric approved by shareholders. Majority of DKSH’s shareholders have voted in favour of the acquisition of Auric and it is expected to complete by 1QFY19. The overall impact of this acquisition on DKSH’s bottomline is likely to be neutral to slightly negative in the immediate term due to higher interest expense (assuming it will be funded by bank borrowing) while synergies may only created in the medium to long term.

Source: PublicInvest Research - 26 Feb 2019

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