Thursday, December 1, 2016

DKSH should still be a strong company

I know I do owe some of you some of my opinion on DKSH. It has done well for the 2Q16 registering RM20.4 million net profit. However, that number has dwindled to RM5.4 million in its 3Q16, which can be shocking for some shareholders as we may not be used to such volatility for a company like DKSH. To be frank, there should not be much seasonality in this business, but I believe the quarter with Hari Raya could have impacted it as it is in the distribution business.

Other than that, there should not be much of a reason for its profits to be that way except that it took a much higher provision for impairment in receivables of RM9.72 million (see below). While it is not a good thing for the company, I guess it sometimes an unavoidable thing - being part of business.

The company took a RM9.72 million impairment charge for 3Q16
For those that are worried over this, I do not think this is a concern.

I actually have someone who asked me and being concern over its low cash in the balance sheet. Its cash as shown below was left at RM9.674 million. Again, I do not think that it is a cause for concern as DKSH certainly has short term working capital funding from banks. It may just happen that for its closing 3Q16, its cash position seemed to be on the low side.

Cash at RM9.7 million
Because of the nature of its business, do not expect DKSH to have very high profit margin - as it is more of a trading company. I would however be happy if it is able to manage that better. It did better in 2Q16 as compared to 3Q16.

For DKSH or many companies for that matter, we should not be too concerned over its quarter to quarter results but more of its medium to long term fundamental.

It does provide guidance and below is what it says. It does provide a decent to positive outlook of its future.

The reason I own DKSH is that it does have a certain moat as its actual competitors in terms of what it can do is not that many. It is a distributor, not a retailer. Retailers are getting challenges from e-commerce, but DKSH should be able to survive that as its business is more of a B2B rather than B2C.

Further, if one is to look at its reasoning for its growth, the second reason is a very strong reason - companies are more and more looking at doing ONLY what it does best. Which means especially the foreign importers, they will focus on using companies like DKSH to do the market expansion, distribution rather than doing it themselves. This is a global trend now and moving forward.

7 comments:

九剑 said...

What do you think about YEELEE? if u make a comparison between them, it will be exciting!

九剑 said...

Btw, in my opinion... if the retailer- B2C is affected... those retailer who purchase their stock with supplier(DKSH/YEELEE) -B2B will also be affected right?

felicity said...

I have not done comparison against Yee Lee. For the B2B and B2C which I mentioned, it is quite different. Example, Mead Johnson, Kraft may use a different channel to sell its products ultimately to consumer. It may use Lazada, 11Street etc to channel to its final consumers but I would think it will use DKSH as still the market engagement or distribution partner.

Also on the back of my head, I think the scale that Yee Lee has against DKSH would be different. DKSH can ride on its regional strength.

Zuo De said...

i think it's regional strength play a small part as distribution is within Malaysia.

felicity said...

Hi Zuo De

DKSH has presence around Asia. When companies like DKSH negotiates for distribution it could have negotiated for its regional distribution business. It is almost like an audit firm such as PWC, when an audit is done for a group, it is also done for its regional subsidiaries.

Regional business has its strength. The branding is also more powerful by being regional.

Its Malaysian listed is the only one as a subsidiary. As you know, it has a holding company disti listed company. Not sure why they maintain the 75% holding in Malaysia.

九剑 said...

Hi felicity, do you have a Facebook page? its easier for more people to reach your good article.

felicity said...

Yes https://www.facebook.com/MalaysianInvest/