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This article first appeared in The Edge Financial Daily on November 4, 2017

DKSH Holdings (Malaysia) Bhd
(Nov 2, RM4.70)
Maintain outperform with unchanged target price of RM5.80:
We have met DKSH Holdings (Malaysia) Bhd’s management recently to get updates on its performance for the third quarter of financial year 2017 (3QFY17) and its near-term outlook. Demand for consumer goods remained weak and this was partly due to the lack of festivities in 3QFY17. However, the company also lost some market share owing to substitution effect from more affordably priced products. As a result, profit margin for the marketing and distribution segment, which predominantly consists of fast-moving consumer goods, deteriorated in 3QFY17. Also, the company continued to incur additional warehousing cost but we expect this to taper off in 4QFY17. Logistics segment performed well and this was mainly attributed to strong double-digit sales growth for telecommunications.

We expect earnings to improve in 4QFY17, underpinned by stronger sales for consumer goods due to festivities (Deepavali, Christmas, New Year celebrations) and lower warehousing cost. Meanwhile, we expect logistics to sustain its double-digit sales growth on higher revenues from telecommunications.

We believe U Mobile Sdn Bhd would continue to garner additional market share at the expense of the incumbent players following the roll-out and usage of additional spectrum under the 900MHz and 1,800MHz bands effective July 2017.

The improvement in network quality and new product offerings should help boost U Mobile’s customer base.

We note that borrowings increased in 3QFY17, resulting in a net gearing position of 0.25 times. The increase was largely due to higher working-capital requirement as sales slowed down (seasonal) in 3Q but we believe its operating cash flow would improve in 4QFY17.

There is no change to our earnings forecasts as we believe DKSH’s long-term growth will still be supported by Malaysia’s growing middle class, rising trend of outsourcing by clients, and market expansion into Asia. We forecast a three-year earnings compound annual growth rate of 5.9%, in line with our gross domestic product forecasts of 5.3% and 5.1% for 2017 and 2018 respectively. — PublicInvest Research, Nov 2

We have met DKSH Holdings (Malaysia) Bhd’s management recently to get updates on its performance for the third quarter of financial year 2017 (3QFY17) and its near-term outlook. Demand for consumer goods remained weak and this was partly due to the lack of festivities in 3QFY17. However, the company also lost some market share owing to substitution effect from more affordably priced products. As a result, profit margin for the marketing and distribution segment, which predominantly consists of fast-moving consumer goods, deteriorated in 3QFY17. Also, the company continued to incur additional warehousing cost but we expect this to taper off in 4QFY17. Logistics segment performed well and this was mainly attributed to strong double-digit sales growth for telecommunications.

We expect earnings to improve in 4QFY17, underpinned by stronger sales for consumer goods due to festivities (Deepavali, Christmas, New Year celebrations) and lower warehousing cost. Meanwhile, we expect logistics to sustain its double-digit sales growth on higher revenues from telecommunications.

We believe U Mobile Sdn Bhd would continue to garner additional market share at the expense of the incumbent players following the roll-out and usage of additional spectrum under the 900MHz and 1,800MHz bands effective July 2017.

The improvement in network quality and new product offerings should help boost U Mobile’s customer base.

We note that borrowings increased in 3QFY17, resulting in a net gearing position of 0.25 times. The increase was largely due to higher working-capital requirement as sales slowed down (seasonal) in 3Q but we believe its operating cash flow would improve in 4QFY17.

There is no change to our earnings forecasts as we believe DKSH’s long-term growth will still be supported by Malaysia’s growing middle class, rising trend of outsourcing by clients, and market expansion into Asia. We forecast a three-year earnings compound annual growth rate of 5.9%, in line with our gross domestic product forecasts of 5.3% and 5.1% for 2017 and 2018 respectively. — PublicInvest Research, Nov 2

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