DKSH’s 1QFY23 net profit surged by 30.6% YoY to RM37m, driven by the higher festive spending which resulted in stronger profit margins for all three operating segments. Results were above our and consensus estimates, accounting for 40% and 41% respectively. The discrepancy in our forecast was mainly due to the stronger-than-expected sales. We raise our earnings forecast for FY23-25F by 5-12%, to account for the higher margin assumption. Nevertheless, we are still cautious on DKSH’s outlook as we believe the strong earnings momentum may not sustain in the coming quarters due to the effect of higher interest rates on consumer spending. We maintain our Neutral call on DKSH with a higher TP of RM5.45 (previously RM4.68) based on a PE multiple of 8x (in-line with its 5-year average forward PE) while we roll-forward our valuation base year to FY24F.

• 1QFY23 revenue rose by 8.2% YoY to RM1.96bn, mainly due to  stronger performance from Consumer Goods (previously Marketing and  Distribution) segment. Consumer Goods segment saw its revenue  increased by 10.9% YoY on higher festive sales (Chinese New Year and  spill over effect from Hari Raya). Healthcare (previously Logistics)  segment sales grew by 3.9% YoY underpinned by new clients secured  and strong growth from existing clients.

• 1QFY23 core net profit grew by 30.6% YoY to RM37m, as EBIT  margin improved by 0.43ppts to 2.87%. We believe the improvement in  operating margins was mainly due to better product sales mix and  operational efficiency.

• Outlook. We remain cautious over DKSH’s future outlook despite the  strong 1Q results as we expect DKSH to post weaker earnings in the  subsequent quarters. While 2Q has always been a seasonally stronger  quarter for DKSH, we expect festive spending to taper-off given a  change in normal seasonal flows. Additionally, we believe that the rising  interest rate environment will result in softer consumer consumption.  Nevertheless, we think that the improved sales mix from its in-house  brands (SDS and Buttercup) and better operational efficiencies from its  on-going cost efficiency project will partly cushion the impact of slower  consumer consumption.

Source: PublicInvest Research - 19 May 2023