Broad Exposure to Rising Consumer Sentiments

DKSH is one of the largest market expansion and supply chain management service providers in Malaysia, focusing on the fields of consumer goods, healthcare and performance materials. While growth has been quite tepid over the past few years, a turnaround in consumer sentiments from recent measures by the new government might provide positive catalysts to DKSH. Stock currently trades at 11.4x 12-month forward consensus earnings of RM56m, or at a sharp 24.5% discount to its 5-year average PE of 15.1x.

Leading ‘market Expansion’ Service Provider

DKSH is one of the larger supply chain distributors in Malaysia. DKSH calls themselves a market expansion services expert, as it serves a number major brands providing end-to-end solutions in the sourcing, marketing, sales, logistics, distribution, fulfilment and after-sales services for businesses in Malaysia. DKSH counts numerous large and well known international and local household brands (such as Mead Johnson, Heinz and Oldtown) as well as healthcare players such as Roche, GSK and Pfizer as clients for market expansion in Malaysia. DKSH also operates the Famous Amos chocolate chip cookie retail chain and distributes prepaid telephone cards for a key telecommunication services provider.

Subdued Performance in the Past Few Years But…

Revenue grew at a 10-year CAGR of 4.3%, but was relatively flat over the past few years. This was in line with subdued consumers sentiments, especially with the implementation of the GST in 2015. Likewise, net income growth has been quite subdued although notably company has focused on cost improvements over the past 2 years leading to operating margin enhancement. (See focus charts on page 3)

…positioned to Benefit From Rising Consumer Sentiments

Improving consumer sentiments through initiatives put forward by the current government is seen to drive the retail segment. Due to a wide array of household FMCG, healthcare & lifestyle and even luxury products distributed by DKSH, DKSH is poised to benefit from a general rise in consumer sentiments as well as a rising trend of outsourcing of supply chain management by clients. As DKSH operates on relatively thin margins, earnings growth upside will come from higher sales and also expanding their customer base to other consumer products. We gather that DKSH is also beefing up its e-commerce capabilities through acquisitions in Asia to tap into the rising prominence of e-commerce sales in the region.

PE Valuations Look Appealing – Trading at 24.5% Discount to Mean

DKSH does not look like a high growth company, in view of the past earnings performance and the nature of the FMCG distributing industry which is relatively fractured. However, investors can probably take comfort in the reputation and track record of DKSH which has been a major player in the region for years. Moreover, DKSH has strong parentage, being a subsidiary of DKSH AG headquartered in Zurich, Switzerland. The recent measures introduced by the new government should spur consumer spending, serving as a potential PE re-rating catalyst for DKSH. Stock is currently trading at 11.4x 2018 consensus earnings estimates against its 5-year mean of 15.1x.

Source: Affin Hwang Research - 21 May 2018