DKSH’s 3QFY21 net profit declined by 15.7% YoY to RM11.5m, mainly due to unfavourable change in margin mix from the logistics segment and higher than-expected effective tax rate. Cumulative 9MFY21 net profit came in at RM61m, within our and consensus expectations, accounting for 75% and 76% of our full-year forecast respectively. Since our upgrade on 27th August 2021, DKSH’s share price has risen by 75%. We think that the recent run in share price had already priced in the positive earnings growth from the reopening of the economy and improvement in operating margins. In addition, as the share price is currently trading at +1 SD of its 3-year historical average (see figure 1), which is near our TP of RM6.00 (based on 11x FY22F EPS), we think the stock is fairly valued. Therefore, we downgrade our call on DKSH to Neutral.

• 3QFY21 revenue fell marginally by 1.4% YoY to RM1.61bn, due to the lower contribution from the Logistics segment (-3.4% YoY). The reduction in revenue was mainly due to the exit of a telecommunications client. Meanwhile, the growth in Marketing and Distribution (M&D) (+0.7% YoY) segment helped to partially offset the decline in sales from the Logistics segment. The Others segment saw its sales declined by 38.1% YoY, as it continued to be affected by the Covid-19 related movement restrictions.

• 3QFY21 operating profit declined by 11% YoY to RM23.8m, dragged by the weaker contribution from the Logistics (-15.2% YoY) and Others (- 39.5% YoY) segment. The poor performance from the Logistics segment was mainly due to the change in margin mix. The Others segment recorded a wider loss of RM3.6m from RM2.6m, due to the lower sales recorded. On the other hand, M&D segment’s operating profit increased by 0.4% YoY, in tandem with the revenue growth.

• Outlook. While we are still positive on its long-term outlook, we are downgrading DKSH to Neutral, as we think that its current valuation has priced in its near term growth potential. We believe DKSH’s long-term growth will be supported by its focus on new business acquisition, cost efficiency improvements as well as working capital management to provide better support to its profit margins.

Source: PublicInvest Research - 29 Nov 2021