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Author: Icon8888   |   Latest post: Tue, 1 Jan 2019, 07:41 PM

 

(Icon) Why DKSH At Current Level Is Less Risky Than Many People Think

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DKSH traded between RM4 and RM6 most of the time. Based on 158 mil shares, the market essentially ascribed it a valuation ranging from RM632 mil to RM948 mil.

 

Based on historical earning of RM51 mil, it seemed that the market is comfortable with PER between 12 times and 18 times for the company.

 

However, due to its recent announcement of intended acquisition of Auric Pacific for RM500 mil (yet to be consummated), share price has collapsed to RM2.35 as at today. This translates into market cap of RM371 mil.

 

Investors have reason to be worried. As at September 2018, DKSH has RM190 mil borrowings and small amount of cash. Plus the RM500 mil borrowings to fund the acquisition, interest bearing debts will balloon to RM690 mil. This is quite a huge amount, as shareholders' funds is only RM586 mil. Gearing will become 1.17 times.

 

For most people, the first reaction is to shy away, as there is certain degree of financial risk associated with such high gearing.

 

What happens if there is an economic downturn and DKSH faces liquidity problem ? Will DKSH go into financial distress ?

 

Not likely. Because they can always do a cash call (rights issue or placement, depends on the price). Swiss major shareholder holds 74% equity interest in DKSH.

 

Isn't that bad ? Wouldn't that result in expansion of equity base, potentially diluting earnings and ROE ?

 

Yes, it will.

 

But if you take a closer look, even if that happens, worst come to the worst market capitalisation will go back to pre decline level.

 

Let's put in some numbers for illustration purpose.

 

Let's say DKSH does a rights issue of RM200 mil. That should be sufficient to address the issue as borrowings will be brought down to a more comfortable level of RM490 mil, while shareholders' funds will become RM786 mil. Gearing will drop from 1.17 times to 0.62 times. A relatively conservative and safe level for an established and well run company such as DKSH. (you can do another simulation with RM300 mil cash call, and the gearing will drop to 0.44 times).

 

What will happen when market cap balloon from the current RM371 mil to RM571 mil post rights issue ?

 

Nothing bad or drastic will really happen.

 

This is because based on DKSH's earning of RM51 mil, market had previously accepted a valuation ranging from RM632 mil to RM948 mil.

 

I know the message is not really that clear at this point, let me elaborate.

 

The market has penalised DKSH very severely due to the Auric Pacific deal, causing its market cap to decline from RM632 mil to RM371 mil now.

 

Due to that overreaction, even if they subsequently undertake a rights issue of RM200 mil to RM300 mil, worst come to the worst, you will face stagnation of share price. Share price is unlikely to go further down from current level.

 

In other words, if you buy at current level of RM2.35 and you are lucky, there will be no cash call, and you can potentially enjoy upside of 100% as share price goes back to as high as RM6.00 pursuant to earning multiple reflation.

 

If you are unlucky and there is a cash call, you are likely only to lose the opportunity for capital appreciation. There is unlikely to be huge downside risk. Because historically the market has already been comfortable with such market capitalisation based on earning of RM51 mil.

 

Limited risk, with substantial upside. That is how I see DKSH at current price level.

 

(If you find my reasoning above incorrect, kindly let me know. As I would also want to take remedial action to correct my mistake. Thank you)

 

p/s : Cynics will accuse me of intention to pump and dump. Just wait for them to appear.

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Labels: DKSH

Related Stocks

Chart Stock Name Last Change Volume 
DKSH 2.75 -0.03 (1.08%) 206,000 

  2 people like this.
 
moneykj Hehe...Loaded 15% in stock pick portfolio. 4.00 is not a problem, represent more than 50% gain.
@Icon, why you didn't put in your portfolio?
22/01/2019 12:58
Connie555 looking for my son where is him right now..... this is unethical icon gor, ltr my baby will cry mother cry dad again.....T.T

his dad hv to work 8hrs under the sun for the lego, now he cry around ltr fan dou his lou dao working pulak....i am worry
22/01/2019 13:21
qqq3 i think have put in a lot of thoughts.......
22/01/2019 13:27
Najib Zamry Even I Capital has buy call for DKSH at this price now.
22/01/2019 13:28
Airline Bobby Whatever it is. After March only invest.
22/01/2019 13:28
3iii http://www.corporateinformation.com/ImageSvr/Chart.ashx?T=SS&C=C458G7980
22/01/2019 13:32
Nicholasming91 Right issue will go up kah? Lol
22/01/2019 13:35
qqq3 The Company is majority-owned by
DKSH Holding Ltd. of Switzerland
(“DKSH Switzerland”).

The case of 2 Swiss companies in Malaysia....

One Nestle

and one DKSH, long term investors also die die kaw kaw......

stockmarket not so easy........
22/01/2019 13:41
dudu Buying a company with 500m, but that company only earn 20m yearly....PE25....500m financial cost almost 20m yearly
22/01/2019 18:26
csan icon8888, have you considered that dksh is overvalued at those earlier prices you mentioned? at 10sen dividend previously and share price of RM4-6, dividend yield is 1.7-2.5%.this yield is reasonable if earnings growth is good. now with that kind of borrowing, can safely assume that dividend will drop significantly.
22/01/2019 20:41
csan market had also previously accepted valuation of RM0.80 to RM1 for sasbadi. don't con people man...
22/01/2019 20:45
csan also to add to my first comment, earnings growth has started to become negative. even less reason to accept previous valuations.
22/01/2019 20:46
Icon8888 Csan the dividend question is easy to answer. 158 mil shares x 10 Sen is 16 mil RM

Not a big amount
22/01/2019 20:49
Icon8888 Actually nobody knows. Only dksh management knows

A logical thing to do is to rationalise auric post acquisition. There are plenty of ways to do it. For example VSS to reduce workforce as dksh itself is expert in this kind of industry and doesn’t really need so many auric employees.

the major shareholder holds 74%. They have a lot at stake. I think they won’t do a dumb deal. They must have got all worked out before deciding



csan also to add to my first comment, earnings growth has started to become negative. even less reason to accept previous valuations.
22/01/2019 20:46
22/01/2019 20:59
paperplane Icon, if really so damn good, why mgt not doing share buyback, look at. Myeg, without fail, everyday 2mil, damn crazy
22/01/2019 21:29
Najib Zamry Icon8888, DKSH ‘S share price bashed down not due to Auric acquisition but more on the exclusion from Syariah Conpliance. You can see before Auric ‘S acquisition the share price already traded ae round 2.14 to 2.28
22/01/2019 21:45
godhand dksh and its sad margin. it is cheap for a reason
22/01/2019 23:10
paperplane Why they need to acquire new company? Have u ask yourself? Is it organic growth by itself too slow? Or is it some other reasons???
23/01/2019 00:41
factorrumour at what price did u entered icon?
23/01/2019 01:15
Icon8888 225
23/01/2019 06:05
3iii ONE PAGE QUICK ANALYSIS OF A STOCK
An Aid to your Stock Selection

COMPANY NAME: DKSH
DATE OF ANALYSIS: 22.1.2019

For each question below, answer YES or NO

NO QUESTIONS
1 Have Sales increased CONTINUOUSLY for 5 years? NO
2 Have Sales DOUBLED in 5 - 7 years? NO
3 Have Earnings per Share increased CONTINUOUSLY for 5 years? NO
4 Have Earnings per Shares DOUBLED in 5 years? NO
5 Any Dividend paid during the past 5 years? YES
6 Has Dividend per Share increased CONTINUOUSLY for 5 years? NO
7 Is current Operating Margin (OM) = or > 15%? NO
8 Over the past 3 years, is OM stable/increasing? YES
9 Is current Return on Equity (ROE) = or > 15%? NO
10 Over the past 3 years, is ROE stable/increasing? NO
11 Is current Long Term Debt less than 1/3 of Net Worth? YES
12 Are Current Assets TWICE the Current Liabilities? NO
13 Does Cash plus Receivables EQUAL OR EXCEED Current Liabilities? NO
14 Is Projected Growth in EPS and Dividends at 15%? NO
15 Is Current P/E in the range of past 5 years Average P/Es? YES
16 SUMMARY: Is the Stock Worthy of further Analysis? NO



YES 4
NO 12
23/01/2019 14:15
Icon8888 that shows how stupid the checklist is

if the checklist is applied to DKSH before collapse at RM6, it is of course a NO NO NO lah

but if the checklist is applied to DKSH after the share price has declined by 50%, then it is a different story

the risk reward balance has shifted mah

that is exactly my point - don't blindly follow guidance prescribed by Famous Investors

use your own brain to think independently. God gives it to you for a reason
30/01/2019 09:47
Fabien Extraordinaire that's why 3iii can only invest in that small universe stocks that meet the checklist. a very small sample.
30/01/2019 09:56
Choivo Capital Hmm, id rather buy petronm. Better absolute opportunities. That's about it.

This article is quite balanced. I dont think it has pump and dump nature.
30/01/2019 09:59


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