DKSH Holdings (M) Berhad - Acquiring High-Margin FMCG Player

Date: 24/12/2018

Source  :  PUBLIC BANK
Stock  :  DKSH       Price Target  :  3.00      |      Price Call  :  BUY
        Last Price  :  2.85      |      Upside/Downside  :  +0.15 (5.26%)

DKSH Holdings (DKSH) has proposed to acquire the entire equity interest in Auric Pacific (M) S/B (Auric) for a cash consideration of SGD157.7m (or RM480.9m). Auric is involved in the distribution of chilled and frozen products and food services channel in Malaysia. The acquisition cost appears to be expensive at about 18x PER (based on annualised FY18 earnings) but this may be justified by Auric’s relatively high profit margins of c.7% compared to DKSH’s 1-2%. We are positive on the acquisition due to potential synergies to be created through extension of client portfolio base, cross selling and expansion of house brands product range. On a separate note, DKSH was recently excluded from the Shariah-compliant list, which has resulted in a heavy sell-down on its shares. We do not expect it to be reinstated in the near future (as the proportion of prohibited business activities has increased and breached the allowable threshold) and we cut our TP to RM3.00 (from RM3.40 previously at 10x FY19F PER) based on 9x FY19F, following the decline in its market valuation. Nevertheless, trading at only 7x forward earnings, we think DKSH is undervalued. Given its attractive valuation and possible margin expansion arising from this acquisition, we upgrade the stock to Outperform.

  • Complementary to existing business. The proposed acquisition will enable DKSH to increase its market share in the market expansion services industry in Malaysia and provide opportunity to grow its position in the fast-moving consumer good (FMCG) segment. This also represents a gateway for DKSH to increase its product and client portfolio base. We understand that Auric serves the food services channel for hotels, restaurants and cafes as well as distributes leading butter brands like Buttercup and SCS.
  • Earnings accretive in the medium to long term. The acquisition is targeted to complete by 1QFY19. In the past 3 years, Auric was able to achieve net profit margin of 3-7% while year to-date FY18 was about 8%. It posted an annual net profit of c.RM20m, which is more than 35% of DKSH’s projected earnings. However, should this acquisition be fully funded by bank borrowings, the overall impact on DKSH’s bottomline is likely to be neutral to slightly negative in the immediate term due to higher interest expense while synergies may only created in the medium to long term. Meanwhile, funding should not be an issue given its low gearing. Assuming acquisition is fully funded by borrowings, its net gearing is expected to go up to 0.9x.

Source: PublicInvest Research - 24 Dec 2018

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