Investment Merits

• Long presence with established network throughout Malaysia

• Consistent dividend of 15 sen being declared for FY12-15 regardless of group performance

• Employs more aggressive strategies to expand new agencies and to gain further penetration into rural markets

Company Profile

Harrisons Holdings (Malaysia) (Harrisons) is involved in the sales, marketing, warehousing and distribution for fast-moving consumer goods (FMCG), building materials and engineering products, fine wines, agricultural and industrial chemicals, and the operation of shipping, logistics and travel agencies. It has approximately 400 principals and distributes about 11,000 product items over 10,000 accounts spread throughout Malaysia. The group has a track record of long-standing principals, such as Nestle Malaysia, Heineken Malaysia (previously Guinness Anchor), Hume Cemboard Industries SB (a member of the Hong Leong group of companies) and Maersk Line.

Highlights

Long and stable presence in the industry. Harrisons has over 90 years in the business of sales, marketing, and distribution, mainly for FMCG and building materials. Currently, the group has 29 branches strategically located throughout Malaysia: i. 13 in West Malaysia; ii. Nine in Sabah; iii. Seven in Sarawak. For the FMCG segment, we believe the group can tap on its extensive distribution network to achieve higher sales, which should bode well with its strategy to gain deeper market penetration, especially in rural areas. Moreover, Harrisons has long-term renowned principals, such as Nestle Malaysia, Fraser & Neave Holdings (F&N), Heineken Malaysia, Colgate-Palmolive Malaysia SB, Reckitt Benckiser (Malaysia) SB, SCA Hygiene Malaysia SB, Thai Glico Co Ltd and Kao (Malaysia) SB, whereby the demand for the products under these brands is more likely to be inelastic amid this economic environment.

Consistent dividends declared for FY12-15. The group has been declaring 15 sen dividend annually for the last four years, regardless of its performance. While there is no dividend policy, we think that Harrisons is likely to declare a 15 sen dividend for FY16-18F, implying an attractive yield of 4.4%.

Deploying a more aggressive approach to improve group performance. Since FY16, Harrisons has adopted a more aggressive approach to secure new agencies in order to attain higher sales. On top of that, we gather that management is looking into adding more warehouses, which is likely to strengthen its storage capacity. Besides, the group is also working on reducing operation costs and looking into upgrading to a new IT system in order to increase operational efficiency. Notably, the group was able to maintain EBIT margins of around 2% for the last four quarters, despite operating in a challenging economic environment.

Company Report Card

Latest results. Harrisons’ FY16 core net profit of MYR20.4m was a 40% YoY improvement. This was on the back of higher GPMs as well as lower opex, financing costs and effective tax rate.

Balance sheet/cash flow. As of FY16, Harrisons has net gearing of 0.08x, which allows the group the option to secure debt financing in the event of future geographical expansion or acquisition activity. Meanwhile, we expect higher capex to be incurred in FY17F for the upgrading of new IT systems, which would eventually help to increase operational efficiency.

ROE. ROE stood at 6.9% in FY16. We expect it to grow to 7% in FY17F, supported by earnings growth.

Dividend. So far, no dividend has been declared for FY16. For the last four years, Harrisons has been declaring 15 sen dividend after the financial year end. Ceteris paribus, we expect the group to declare a 15 sen dividend for FY16-18F.

Management. Harrisons is led by group managing director Mr Chan Poh Kim, who has more than 25 years of experience in the group.

Recommendation

We value Harrisons at fair value of MYR3.92, based on FY17F P/E of 12.5x. Our FY17F P/E is derived from its 5-year historical +1SD level, as we think that Harrisons has a well-established distribution network with a stable, long-term customer base. Besides, the assigned P/E is below its recent high of 15.9x in 2016.

Source: RHB Securities Research - 5 May 2017