PublicInvest Research

Author: PublicInvest   |   Latest post: Thu, 22 Oct 2020, 9:57 AM


DKSH Holdings (M) Berhad - Remain Resilient In The Long Run

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DKSH would have benefitted from the surge in demand for FMCG with the implementation of the Movement Control Order (MCO), however, we are taking a conservative approach as we are of the view that DKSH is unlikely to remain unaffected by the slowdown in consumer spending. Therefore, we are adjusting our FY20-22F earnings forecast downwards by 9-14%, hinging on our anticipation that a decline in sales would squeeze operating margin as DKSH continues to incur storage, staff and rental costs. As such, our TP is subsequently revised downwards to RM2.65 (previously 2.93) based on 9x PER FY20 EPS. Our Outperform call is maintained given an attractive valuation as DKSH is currently trading at -2SD of 5-year average PE (figure 1).

  • Essential services to remain operational. Both DKSH’s marketing and distribution segment and logistics segment remains operational throughout MCO to supply essential daily items. However we understand that there are some healthcare items that might be facing some hiccups given the disruption to global supply chain.
  • Malaysia Consumer Sentiment at 51.1. According to Malaysia Institute Economic Research (MIER), Malaysia’s consumer sentiment in March 2020 reached a record low of 51.1 points. Furthermore, MIER had also projected 2.4m job losses under the worst case scenario which would have a bigger negative impact on the economy. We believe consumer spending will likely to remain lacklustre in the near term.
  • Anticipating subdued demand for consumer goods. DKSH would likely receive a short term boost from the higher marketing and distribution activities due to panic buying during the initial stages of MCO. However, as panic buying seem to be tapering off while consumer spending is likely to remain muted, we are adjusting our earnings forecast downwards by 9-14% to account for the weaker demand. Nevertheless, post-MCO, we are of the view that consumer spending should normalise in 4QCY20 on the back of higher consumption ahead of the festive seasons.
  • Maintain Outperform. Despite the near term headwinds, we remain optimistic on DKSH’s long term prospects underpinned by the growing middle class in Malaysia. In addition, we believe that the growth acceleration program and the integration of Auric Malaysia will act as a buffer and potentially improve DKSH’s margins moving forward.

Source: PublicInvest Research - 29 Apr 2020

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