I am so surprised that the sell down in DKSH is so steep. I think the irrational sell down is overdone. My 2 cents worth on DKSH's 3Q16 result

1) record high impairment of receivable (RM14.5m) in 9m16 shouldn't be viewed as a broad base bad debt, management has mentioned this is one-off in the quarter results so I think it is an isolated case/client. Why would I so confident on this non-recurring impairment? Well, if you look at their past 5 yrs impairment on receivables, the avg impairment p.a was only RM0.2m (Don't just take my word for it, you can verify the numbers by checking its past annual reports). So I am not too concern on this impairment charges.

2) Profit is not that bad after you exclude the one-off impairment, which comes to about rm12m, as compared to RM4.5m in 3Q15. In terms of qoq, the profit is indeed a lot lower (2Q16 pat ex impairment = rm23.9m). This is mainly due to the 7% qoq revenue contraction. In absolute amount, revenue declined by rm98m qoq. Assuming 9% gross profit margin, the lost of profit is rm8.8m. So this adds up to rm20-21m quarterly profit if the revenue sustain at rm1.35bn, which is a consistent revenue base since 4Q15, before coming off in 3Q16.

3) Cash flow seems to deteriorated rapidly with many investor pondering where the cash has gone? Obviously, the cash lock up in working capital (receivables & inventory) after the sales disappointed. It would probably normalize in next quarter. If you noticed, the co's net cash position is always very volatile from quarter to quarter but the fact is, it has been in net cash since full year 2013. 

In conclusion, DKSH's 3Q16 results was not very good, but definitely not in a crisis. If you exclude the rm14.5m impairment in 9M16, the co reported rm47m pat. If it makes another rm13m in 4q16 (+30% yoy), the co will probably match its record core profit of about rm60m in 2013 and 2014. Bear in mind, DKSH share price traded above rm8.50 in March 2014. Price has came off subsequently but avg traded price throughout 2014 was still above RM7.00.

Hence, it really doesn't make sense to see the price continue to trend down from current level. If revenue recover to 1.35bn per quarter, I think the profit will be closer to rm20m level.