What’s Going On?

Figure 1.0: Company logo of DCHCARE

Investors are buzzing over the significant loss reported by DC Healthcare Holdings Berhad (KLSE: DCHCARE) this quarter. What caused such a drastic dip in both revenue and profit before tax for DCHCARE?

Diving Deeper into Results

Figure 2.0: Revenue and Gross Profit of DCHCARE

DCHCARE's revenue dropped from RM16.8 million in Q1 FY2023 to RM9.5 million in Q1 FY2024. Along with this, the gross profit plummeted from RM9.8 million to RM1.2 million, resulting in a net loss of RM7.9 million for the company.

Typically, investors only focus on the profit and loss statement to assess financial health. However, in DCHCARE’s case, it's crucial to examine their statement of financial position as well.

Figure 2.1: Current liabilities of DCHCARE

While there is a decrease in the revenue of the company, the contract liabilities of the company had increased significantly from RM9.6 million from RM3.7 million. 

Now, what are contract liabilities?

Despite the revenue decline, the company’s contract liabilities increased significantly from RM3.7 million to RM9.6 million. What are contract liabilities? Essentially, DCHCARE collects deposits from clients for the next 12 months' aesthetic services, an increase from the initial 3 months.

This strategy significantly enhances cash flow as the company collects money upfront, but costs are only accounted for upon service redemption. Under Malaysia Financial Reporting Standards (MFRS), revenue can only be recognized when clients redeem their services. So, even if DCHCARE has cash on hand, it’s not considered revenue yet.

For those familiar with aesthetic services, refunds are typically not provided, and deposits expire if not used within 12 months. Reverse calculations suggest that actual revenue this quarter should be RM15.4 million (RM9.5 million + RM5.9 million).

But what about profits?

Figure 3.0: Review of performance for DCHCARE

This quarter, three additional outlets were established compared to the previous quarter. According to DCHCARE’s prospectus, each aesthetic clinic costs RM1.0 million to RM1.5 million to establish, while slimming centers cost RM0.7 million to RM0.8 million.

Thus, the quarter appears lumpy as significant costs were incurred, but MFRS rules prevent recognizing deposits as revenue until services are rendered.

Conclusion

Figure 4.0: Share price performance of DCHCARE

We see this as a major mispricing by the market due to misunderstanding the revenue recognition of DCHCARE. Aesthetic services are a long-term profitable venture, and the company has ample cash for further expansion.

This is definitely a good chance to invest in DCHCARE now!

Disclaimer

The information provided in this article is for educational and informational purposes only and should not be considered financial advice. Investing in stocks involves risks, including the loss of principal. Always conduct your own research and consult with a qualified financial advisor before making any investment decisions. The author holds no responsibility for any investment decisions made based on the information provided.