No strong sales uplift from GST zero-rating seen for DKSH

This article first appeared in The Edge Financial Daily, on August 17, 2018.
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DKSH Holdings (Malaysia) Bhd
(Aug 16, RM3.81)
Downgrade to neutral with a lower target price (TP) of RM4.25:
We met with DKSH Holdings (Malaysia) Bhd’s management recently to get updates on its performance and outlook. Based on preliminary estimates, sales are not expected to pick up strongly during the three-month tax holiday when the country’s system migrates from the goods and services tax (GST) to the sales and service tax (SST). Although consumer spending should improve year-on-year (y-o-y) on the back of GST zero-rating (June to August 2018), we believe the overall retail spending on non-discretionary products will remain soft.

We are positive on its long-term prospects, underpinned by the country’s growing middle class, rising trend of outsourcing and market expansion into Asia, but earnings are not likely to grow sharply in the medium term. Given the decline in its five-year historical price-earnings ratio (PER) from 13 times previously, we now peg DKSH at a lower multiple of 11 times financial year ended 2019 forecast (FY19F) PER. Coupled with a cut in our earnings forecasts, our TP is reduced to RM4.25 (RM5 previously). Hence, we downgrade our rating to “neutral”.

The logistics segment remains the key growth driver, supported by the healthcare and telecommunication sub-segments. The profit margin for logistics has been improving gradually since the third quarter of FY16 (3QFY16) due to better product mix and gains on operational efficiencies. Given Malaysia’s low per capita spending on healthcare at US$386 versus the regional average of US$520 (source: World Health Organization, 2015), we believe there is room for growth in the logistics segment in the long run.

Meanwhile, the marketing and distribution (M&D) segment is expected to remain lacklustre in the next six months. Despite GST zero-rating between June and August, sales are not expected to pick up strongly and we attribute this to a more muted retail spending on non-discretionary products. Post SST implementation effective Sept 1, this segment could potentially experience slower sales until December 2018 (seasonal uptick due to festivities).

We cut our FY18F to FY20F earnings forecasts by 2% to 5% to factor in lower margins for the M&D segment. This segment is also affected by a bad account which led to higher allowance of inventory obsolescence in 2QFY18 and this is expected to spill over into the subsequent quarter. — PublicInvest Research, Aug 16