DKSH Holding (M) Bhd

DKSH (M) (Fundamental: 1.8/3, Valuation: 1.8/3) is the market leader in the Market Expansion Services industry. It provides complete marketing and distribution services — across Asia Pacific — for a wide range of products, specialising in consumer goods, healthcare products and medical devices.

The business is essentially a “volume” game. Margins are necessarily thin — averaging just 1.1% in the past 5 years. The company’s advantage is that as part of the wider DKSH group, it enjoys economies of scale and cross-regional synergies that few of its competitors can emulate. DKSH (M) has a well-diversified clientele of more than 150, built on the strength of this franchise and capillary distribution reach.

It has been growing steadily. Revenue expanded at a CAGR of 8.4% from RM3.9 billion in 2010 to RM5.3 billion in 2014. Net profit more than doubled from RM28 million to RM60 million, although there are y-y fluctuations during this period. In 2013, DKSH disposed of its non-core freight forwarding business and distribution centre at Jalan University in Petaling Jaya, netting a one-off gain of RM105.9 million.

Stripping out extraordinary gains, net profit from continuing operations for 2014 was marginally lower y-y, due to higher sales of lower margin products and additional rental costs for a new distribution centre in Shah Alam.

Revenue should remain fairly resilient given its wide range of products. Two market trends underpin its longer-term growth prospects: growing domestic consumption for consumer goods and healthcare products, and more manufacturers outsourcing their marketing and distribution activities.

Valuations are reasonable, with a trailing 12-month P/E of 13.4 times. Dividends totaled 9.5 sen per share last year, giving a yield of 1.9%.

Net cash stood at RM11.5 million. ROE dipped to 13% in 2014, after the big jump in shareholders’ funds that was lifted by one-off gains in 2012 — but still decent.

This article first appeared in The Edge Financial Daily, on July 8, 2015.