Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on August 10, 2020 - August 16, 2020

THIS year was going to be when DKSH Holdings (M) Bhd reaped the full benefits from its acquisition of smaller rival Auric Pacific (M) Sdn Bhd and its investment in an efficiency improvement project.

The Swiss trading conglomerate paid RM480.9 million for Auric Pacific, which is involved in the distribution of chilled and frozen products such as Buttercup spread and SCS butter. The takeover was completed in March last year and the company was fully integrated into the group’s existing portfolio in September.

“We went into the year saying we would just continue to grow and expand as we now have more channels and [wider] reach. We were all set to realise our synergies [from the integration],” DKSH Malaysia head of country management and vice-president of country finance Nicholas McLaren tells The Edge in an interview.

Last year, Auric Pacific accounted for one-third of the group’s profitability.

The group was also set to benefit from an internal project it started in the fourth quarter ended Dec 31, 2018 (4QFY2018) that focused on increasing the overall profitability of its fast-moving consumer goods (FMCG) business.

According to McLaren, the project has about 300 initiatives such as improvement in client portfolio, sales force efficiency, inventory and cost management and working capital and the profitability related process. DKSH was expected to realise better efficiency from the project this year.

Another thing going for the company, which deals in healthcare, FMCG, technology and performance materials, was that it was starting off with a clean slate as all costs incurred for the acquisition of Auric Pacific as well as those relating to the efficiency improvement project had already been recognised in 2019.

“As for our healthcare business, we were already on a steady growth trajectory and we had expected that to continue this year,” McLaren says, adding that he sees exponential growth in healthcare as Malaysia’s per capita spending on healthcare is still far behind that in Europe and North America.

Just when it thought things were ready to take off, the group was faced with the Covid-19 pandemic, which resulted in the country imposing the Movement Control Order (MCO) on March 18.

Fortunately for DKSH Malaysia, it has been able to operate relatively seamlessly during the MCO period as its operations are considered essential. It also had a business continuity plan already in place.

“We didn’t anticipate a pandemic but were thinking more of the possibility of a fire occurring. Also, we had been pushing towards automating processes and digitisation for a few years so that everyone can work remotely.

“When we saw Covid-19 coming, we decided to give it a last push in February and have all our employees switch from desktops to laptops with virtual private network access. Thus, a week before the MCO started, our employees were already split into teams and working from home except for those working at the distribution centres,” McLaren recalls.

Covid-19 pandemic impact not as bad as feared

The group saw an increase in consumer demand during the initial stages of the MCO, but that tapered off in April.

“Demand slowed in April and May, although the market has since bounced back to almost pre-Covid-19 levels. Where we see the fastest recovery is in consumer goods. Healthcare takes a little bit longer to recover as people are still somewhat nervous about going to hospitals and delaying non-critical or elective procedures,” says McLaren.

DKSH Malaysia expects second-quarter performance to be affected by the pandemic. “But it is not going to be a disaster,” ­McLaren says, adding that its Famous Amos retail outlets had to completely shut down during the MCO period, but this was offset by strong sales from its grocery channel. DKSH Malaysia holds the master licence to operate the Famous Amos chain of retail outlets in the country.

McLaren says Famous Amos same-store sales expanded 10% last year and this could have continued into 2020 if not for the impact of Covid-19.

DKSH Malaysia’s net profit dipped 12% year on year to RM39.05 million in the financial year ended Dec 31, 2019 (FY2019), although its revenue rose 7% y-o-y to RM6.46 billion. It swung back to a RM10.1 million net profit in 1QFY2020 compared with a net loss of RM618,000 a year ago.

“The past year was basically a bridge between the past and the future. This year is the beginning of the future. All things being equal, I think this year’s performance will probably be better than last year’s, driven by the consumer goods and healthcare businesses. We have come through stronger than expected,” says McLaren.

He believes the worst is over for DKSH Malaysia based on the assumption that there is no second wave of Covid-19 infections. “I expect everything to return to pre-Covid-19 levels in the fourth quarter of this year.”

Firm still on lookout for M&A bargains

McLaren says DKSH Malaysia will still keep an eye out for M&A opportunities. “While we are always willing to look at things, I wouldn’t say right now we are actively shopping for [a possible] consumer goods or healthcare [acquisition],” he adds.

The Auric Pacific deal was DKSH Malaysia’s first acquisition since McLaren joined the group five years ago. “We have looked at a few things over the years but they weren’t the right fit,” he says.

As at end-March, DKSH Malaysia was in a net debt position of RM610 million, with cash balance of RM85.49 million while borrowings totalled RM695.53 million.

McLaren says the group may turn to the equity market to raise funds to pare down its debt.

“We don’t have a definitive plan but it is definitely something that we are able to do, particularly with the low interest rates. It may be attractive to do something like that.

“I don’t foresee any major acquisitions like Auric Pacific in the short term. So if we were to raise money, it would be to pare down debt and to stimulate a bit of interest in DKSH Malaysia,” he says, noting that investors had often lamented about the stock’s lower trading liquidity.

As at April 30, DKSH Holding Ltd of Switzerland held a 74.31% stake in the group. The next largest stakeholder is Lembaga Tabung Angkatan Tentera, which owns 4.84% of the company.

In February, as the pandemic gripped the world, DKSH Malaysia decided not to pay a dividend for FY2019, in order to be well prepared for unexpected effects from the crisis.

Asked whether DKSH Malaysia would resume paying dividends this year, McLaren says it is not the company’s strategy not to pay dividends. “It is based on circumstances,” he explains.

He says the decision came as the MCO was nearing implementation. “We didn’t really know [what the economic impact of Covid-19 was going to be]. There were some concerns over collections and receivables.

“Nonetheless, it turned out okay. While a few smaller retailers are struggling, most of our customers are okay. We are committed to discussing it (dividend payments) and if the cash flow is fine, we will probably compensate shareholders [this year].”

DKSH Malaysia’s share price has more than doubled since its March 23 low of RM1.70. The stock closed at RM3.55 last Thursday, giving the company a market capitalisation of RM559.69 million. Year to date, the stock has gained 35%.

Asked whether the group would consider splitting shares, McLaren says, “We are willing to consider it but there is no specific plan.”

 

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