Wednesday, September 26, 2012

Harrisons' RM92 million problem - what to do about it

Harrisons Holdings is a company which I do follow. It has businesses somewhat similar to DKSH. The reason I do not buy Harrisons is due to I already put myself into DKSH and I deem DKSH to be slightly of my preference than Harrisons. Someone pointed to me that Harrisons in fact has better margin than DKSH. Quite rightly commented. Harrisons Gross Profit (GP) margin is slightly above 10% while DKSH's GP is about 7%. That itself is a good benchmark to tell which company is able to sell the products it distributes at a higher price while having a better negotiation power over its suppliers.

However, one has to know where Harrisons strength is versus DKSH. Harrisons traditional strength is in East Malaysia. I would like to think that Harrisons has much better reach and channels in the East where reaching out, having strong contacts with its base is of much importance. If you notice, Harrisons customers include Nestle, F&N, Asia Pacific Brewery for FMCG products. Why such large multinationals where they probably already have strong distribution channels in Malaysia? Because of the channels that Harrisons has built over the years in East Malaysia. Harrisons has that strength. Obviously, with that bargaining power, margins can be higher.

Why do I pick DKSH over Harrisons

For strategic reasons, I feel that DKSH being a regional player with large operations in Asia would be looking to grow much more than Harrisons. If you notice, Harrisons Tradings's arm was bought over by a group of investors from the original Harrisons and Crosfield, one of the largest plantation company in Malaysia, once upon a time. Harrisons and Crosfield later became Golden Hope and of course all those are history with now Sime Darby being the larger group which holds Harrisons Plantations assets.

Now, with that - Harrisons with its large and strong distribution operations in East Malaysia is a company which will not be that aggressive anymore - that's what I think. And because of that DKSH is my preference.  Together with DKSH's bigger operations which is based in Malaysia, it is obvious that DKSH will be a larger operations as well as with more competition. I am an investor with less fear over competition if the company has a far larger advantage. That's what I felt on DKSH for its distributions operations in Malaysia.

Anyway, back to the title. Recently, Harrisons price has dropped some 17% from around RM3.50 to more recent RM2.92. But read below:

This is serious and worrying. What do I think about this? It is a company with huge and strong operations in Sabah. If (you know what) is not able to resolve issues with the Customs, operations of Harrisons can be affected. While, Harrisons obviously can absorb this large penalty, it obviously will try not to pay the RM92 million fine if possible. RM92 million for a company with RM200 million market capitalization is huge. This is not Apple or Sime Darby being slapped with a RM92 million fine.

We do not know whether Harrisons is in the wrong or perhaps the Customs had made the wrong judgement. But I would say lets wait this out - and if Harrisons is in the wrong, it may even change the scenario of its East Malaysia's operations which has been its strength all the while.


Gark said...

If you have been to east Malaysia especially Sabah.. you know there are a lot (almost no legal duty paid beers can be found) of unpaid duty beers which is supposed to be exported (duty free) but was re-diverted back to Malaysia. These beer are manufactured in Malaysia, (Calsberg & Tiger is the popular ones) but with the word export only on it.These beers have their serial number and bar code scratched off to prevent traceability. And Harrison being the largest beer distributor in East Malaysia, although they might not have a direct hand (might be other nominee company etc) in it's re-distribution is more or less an accomplice to the deed. So I am not surprised that Kastam slapped the duty on them, and I think it will be hard for them to wiggle out of it. Also cigarettes is also the exact same case, maybe not targeted by kastam yet.

Gark said...

And this beer situation has been ongoing for the last 20 or so years. If Harrison cannot wiggle out of this case, and if the kastam also demand duty for previous non-duty sales, this company can practically close down.

felicity said...

yup distribution can be messy which is also probably why these breweries would rather use a local player.


CrabGrill said...

Too bad I can't beat anybody to vent my spleen. I felt that I have been raped, and not sure whether it happened or not.

CrabGrill said...


Further to our announcement dated 20 September 2012, the Board hereby announces that Harrisons Trading (Sabah) Sdn Bhd (“HTSB”) had on 2 October 2012 written to Customs to request for an extension of 3 weeks to go through HTSB’s records and extract relevant documents to persuade Customs that HTSB is not liable to pay any import duty, excise duty or sales tax as demanded.
The Board will make such further Announcements as and when there are fresh developments arising in the above matter.
This announcement is dated 3 October 2012.