This article first appeared in The Edge Financial Daily on July 31, 2017

DKSH Holdings (M) Bhd
(July 28, RM5)
Initiate outperform call with a target price (TP) of RM5.80: Founded in the 1860s, DKSH Group has a strong Swiss heritage with over 150 years of experience in providing marketing expansion services in Asia.

DKSH Holdings (M) Bhd (DKSH) is 74.3%-owned by the DKSH Group of Switzerland. It is a market expansion services provider for companies looking to grow their business in Malaysia.

We believe DKSH’s growth will be supported by Malaysia’s growing middle class, rising trend for outsourcing by clients and market expansion into Asia.

We note that DKSH’s business fetches thin margins, but the model is highly scalable as new product lines can be added through the same value chain without a significant incremental change to cost.

We project a three-year earnings’ compound annual growth rate (CAGR) of 6%, supported by gross domestic product (GDP) growth that should eventually lead to a more stable consumer spending on fast-moving consumer goods (FMCGs) and healthcare products.

Sales are estimated to grow on the back of a rising trend for outsourcing, growing middle class and market expansion into Asia. We assume a sales growth of 4% to 6% over the next three years.

Meanwhile, margins are maintained, through ongoing cost control measures in areas like transportation, warehousing and distribution.

DKSH has been trading at a five-year historical forward price-earnings ratio (PER) of 17 times. Pegging it at 16 times financial year 2018 (FY18F) earnings per share (EPS), we derive a target price of RM5.80 for the stock.  — PublicInvest Research, July 28