DKSH Holdings (Malaysia) Bhd (“DKSH”) is a leading Market Expansion Services (“MES”) provider with longstanding track record in Malaysia. Recommend BUY with a target price of RM3.36 based premised on 11x PER FY20 as per its 2-year average valuation.

DKSH as a MES leader provides specialized services in helping companies to grow their business in existing and new markets. Its tailored made services include sourcing, market analysis and research, marketing and sales, distribution and logistics and after-sales services. DKSH is majority-owned by DKSH Holding Ltd of Switzerland, a listed company on the SIX Swiss Exchange with over 150 years of business strength in providing MES across Asia Pacific.

Having operated since year 1923, DKSH Malaysia owns more than 3,000 specialists with 14 distribution centres locally and regionally, serving more than 180 clients (brand owners) and 17,000 customers nationwide. The group focuses on consumer goods, healthcare, performance materials and technology of which its business partners are international household brands namely M&M’s, Oreo, Johnson & Johnson, Jotun, just to name a few.

In March 2019, DKSH has completed the acquisition of Auric Pacific (M) Sdn Bhd (“Auric”), an established distributor of chilled and frozen products in Malaysia. We are positive on the horizontal integration strategy as the acquisition will complement DKSH’s exposure in the fast-moving consumer goods segment. Also, DKSH is able to own Auric’s butter and mélange manufacturing businesses, which is well known for the leading brands of “SCS” and “Buttercup”. Note that the acquisition is set to enhance DKSH’s profitability as Auric has higher net profit margin (circa. 8%) as compared with DKSH’s prevailing net margin of around 1%.

DKSH has an average dividend payout ratio of 39% over the past 5 years, translating to an expected dividend yield of 3.9%. Leveraging on DKSH’s long-standing industry experience and wide sourcing network in Asia, we believe DKSH is set to benefit from the increasing business outsourcing trend for cost efficiency as well as the growing middle class in Malaysia.

Source: Rakuten Research - 10 Sept 2019