This article first appeared in The Edge Financial Daily on November 12, 2018 - November 18, 2018
DKSH Holdings (Malaysia) Bhd
(Nov 9, RM3.05)
Maintain neutral with a lower target price (TP) of RM3.40: DKSH Holdings (Malaysia) Bhd reported a net profit of RM9.2 million in its third quarter ended Sept 30, 2018 (3QFY18), down 8% year-on-year (y-o-y) due to a lower marketing and distribution margin.
Despite delivering higher revenue of +10.7% y-o-y, the marketing and distribution margin fell by 0.4 percentage point to 0.68%. The y-o-y growth in revenue to RM1.52 billion in the quarter was largely due to organic growth in its existing businesses. The marketing and distribution segment posted a 13.7% growth in revenue while the logistics segment delivered a smaller growth of 7.7%.
Despite the transition of the goods and services tax rate from 6% to 0%, the marketing and distribution segment only managed to record an uninspiring quarter-on-quarter (q-o-q) revenue growth of 4.7%, suggesting that consumer confidence remained subdued.
Despite a higher margin posted by the logistics segment (1.44% versus 1.34%), the marketing and distribution segment registered a decline in margin from 1.08% to 0.68%. As a result, the increase in contribution from the logistics segment was offset by a drop in marketing and distribution operating profit. Meanwhile, the “other” segment posted an operating loss RM880,000.
The nine months of FY18 (9MFY18) results were below our expectations, accounting for about 60% of our full-year estimates. We cut our FY18 to FY20 earnings forecasts by 11% to 13% to factor in lower margins for the marketing and distribution segment.
DKSH’s share price has fallen sharply in recent months and we attribute this to the anticipation of weaker consumer spending following the end of the tax holiday as well as poor market sentiments. Despite a compelling valuation of nine times forward earnings, we see limited share price catalyst as we believe consumer spending on premium pricing products would remain lacklustre going forward.
Following the cut in our earnings forecasts, our TP is reduced to RM3.40, based on a lower three-year historical price-earnings multiple of 10 times FY19 earnings per share estimates (previously 11 times). We maintain our “neutral” call on DKSH. — PublicInvest Research, Nov 9