Wow, just realized so many "experts" here talking about how oil price crash will erode Petronm's profit. Looks like everyone is worry about that. Believe it or not, I am still a believer and holding my shares in Petronm. I think time will tell who is right or wrong. As I said earlier, if you buy or sell Petronm's share based on oil price movement, my suggestion is to trade crude oil future.

I must admit that crude oil price movement does have impact to Petronm but the impact is only limited to its inventory holding (typically about 3 weeks) where management hedge half of it (makes sense to hedge as you source your crude from independent oil producer, unlike Shell Refining in the past where they don't hedge as they source from the parent co, this also explains the higher volatility of shell's profit)

I think the key to refining profit is still the refining margin where Jay pointed out correctly that 2Q17 refining margin is still better than 1Q17. Someone also pointed out that crude oil price crash from usd100/bbl in 2014 to 55 (average) and 44 (average) in 2015 and 2016 respectively but Petronm doesn't seem to be affected as it reported higher profit in 2015 (rm221m) and 2016 (rm238m).

Some of you may ask why? I attribute that to 3 factors, (1) refining margin is still the major profit driver, (2) whatever inventory gain and loss is 50% hedged, & (3) the inventory holding at any point in time is only 3 weeks, hence the inventory exposure is on 3 weeks rolling basis. That means the impact is limited to 3 weeks out of 52 weeks if oil price stabilizes after the sudden plunge. Oil price move up and down everyday, so refinery will have inventory gain or loss everyday. That is the reason why Petronm's 2015 & 2016 profit doesn't correlate with oil price crash.

And last but not least, I am still bullish on Petronm's retailing biz, which offers stable profit and growing volume. This is the jewel of the biz.

Pls refer to my previous analysis for Petronm, http://klse.i3investor.com/m/blog/sumato88/118086.jsp

The 2 non listed co named, Petron Fuel International (formerly ExxonMobil Malaysia) & Petron Oil (M) (formerly ExxonMobil Borneo). If you read its annual report, you will realize that 6 out of 11 terminals (for crude oil and refinery product storage before distribute to petrol stations) that Petron Malaysia owns and operates are owned by the sister co, which I believe it is parked under Petron Fuel International. Out of the 6, 3 terminals are Sabah based.

Given that Petrol Oil was formerly known as ExxonMobil Borneo, we can draw to a conclusion that petrol stations in Sabah is owned by sister co.

Terminals in Penang, Port Dickson, KLIA, and Klang Valley Distribution Terminal are owned by listed co. This implies that the high volume stations in Klang Valley are mainly owned by listed co. So you tell me, how many % of its petrol station sales derived from Klang Valley and Penang? I would think the sales proportion is higher than the proportion of the numbers of petrol stations the listed co own.

Kuokseng, I expect RM400m profit for FY17, that means each quarter RM100m, anything above that is a bonus to me.

C NG, I am pretty sure Peso1.5bn of profit is 100% of Petron Malaysia operation, like wise, Peso 345m profit in 1Q16 or RM30m is also 100% of Malaysia operation. Don't think this quarter gonna make RM148m, perhaps 2Q17.

1) there are 3 companies that Petron Corp own that operate in Malaysia, so why 2 of them not part of the listed co, Petronm? That's because the two of the private co were not listed back then when it was own by Exxon Mobile. So Petron Corp bought all 3 companies separately. So the structure remain until now. Well, it is always possible that Petron Corp may inject the other 2 non-listed co into Petronm in future to consolidate the operation in Malaysia.

2) Peso 1.5bn net income is net income before minority, which means it is 100% of Malaysia operation. So don't need to regross it.

http://edge.pse.com.ph/announcements/form.do

The 16.1m is total sales volume, full year was 32m in 2016. Refinery throughput/volume only about 17-19m p.a. over the past 5 years (all disclosed in annual report). So basically, Petronm only produce about 55-65% of what it sell and distributes, the rest of the refined products are imported. That's the reason why I think Petronm is more a PetDag than Shell.

http://www.galpenergia.com/EN/agalpenergia/Os-nossos-negocios/Refinacao-Distribuicao/ARL/Refinacao/Paginas/Didatico-Refinacao.aspx

The complete link is here

Hi, Probability

1) I got the refinery daily throughput from both of the annual report 2015, the throughput shall be higher in 2016 (haven't reveal yet) but I don't think the throughput will spike by 30% yoy.

2) the valuation for Shell's refinery should be higher due to its complexity. And that's also one of the reason why some refineries (including Petron) cannot run at maximum capacity as the low complexity will have high output of low margin products, so to avoid flooding the market with low margin products that will result in losses, some refineries just can't run at max. You can read more about refineries here http://www.galpenergia.com/EN/agalpenergia/Os-nossos-negocios/Refinacao-Distribuicao/ARL/Refinacao/Paginas/Didatico-

3) I beg to differ on same EBITDA profit per litre due to different volume/economic or scales, although I agree there is room for improvement for Petronm when it's volume catch up with the peers.

4) upside can be 140% or more if more investors understand the biz and Petronm deliver higher profit which I think it will although I do think the quarterly profit might be volatile due to the refinery margin. But if we look at the big picture, as long as it reports higher profit yoy and full year or cumulative profit is higher yoy, we shouldn't be too concern on lower profit qoq due to changes in refinery margin, refinery shut down for maintenance and others. The key jewel is its marketing biz which is very valuable in my view. This biz is growing in a saturated market, hence it is gaining market share and better economic of scales.

Hope that helps. Pls forgive me if I don't answer all the questions, will probably answer what I think is more important.

Cheers!

Sorry, goodstock, I will just restrict my discussion at public forum for the time being. I have a full time job and wish not to spend too much time on private discussion. Hope u understand that.

Economic of scales is a very powerful tool, that's the reason why every companies fight for market share at all cost when the demand is growing. every biz have fixed cost such as management, marketing & other back end support team. This cost will not grow linearly when the petrol station network grow. So when the volume is big, you will enjoy economic or scales, as simple as that. This is also the reason why I like DKSH while ppl think the margin is too thin.

Thanks, guys. I just try to be very conservative. If you value Petronm's marketing biz on par with PetDag, you will be shock with the upside. I wouldn't rule that possibility out, Petronm's discount to PetDag and Shell shall narrow over time when more investors understand the biz model and Petronm continues to deliver profit.

Guys, please look at the big picture, crude oil price move up or down everyday, if you buy or sell based on that then better u buy crude oil future. Please see my latest analysis here, I still think the stock is deeply undervalued due to lack of understanding of its business model.
https://klse.i3investor.com/blogs/sumato88/118086.jsp

Here you go, Limit Up.

Don't panic guys, one day crude price down wouldn't affect Petronm. Ytd avg still at usd55 vs usd51 in 4q16. Avg crack spread still higher qoq, I still believe coming quarter results will be making rm100m profit.

Separately, I found one of the crack spread for Ron95 gasoline which is relevant to Petronm (Asia, or the best is SG crack spread is more relevant) in this link. While it came off from the peak but still higher compared to 4q16.

http://www.cmegroup.com/apps/cmegroup/widgets/productLibs/esignal-charts.html?code=AV0&title=MAR_2017_Singapore_Mogas_95_Unleaded_%2528Platts%2529_&type=p&venue=0&monthYear=H7&year=2017&exchangeCode=XNYM

Yes, I am.


Goodstock sumato88 , are you still with us ??
08/03/2017 09:36

Sorry, Goodstock. I just realize u ask me question on Petronm. Yes, I'm still in it. Sorry as I don't check comments all the time.

I always welcome different opinions in market, as long as it is a constructive 1. After all, no one can be right all the time. But I am wondering if this is no good for IWC shareholders, then no deal is better? I am very sure if there is no merger into IWH who owns the Bandar Malaysia development, no one will be keen to buy IWC given such bad market condition in Iskandar. So now there is a deal on the table, how bad can it be? If price really fell all the way to RM1.15 (-30% down), then market doesn't believe the Bandar Malaysia development will materialize.

Personally, I think this project is too huge to fail. Why? Because Chinese already bought a stake in it, Najib must make sure the project a huge success (& 1MDB still owns 40%). That's why Bandar Malaysia will house the high speed rail station, mrt, give 10 yr tax exemption to foreign corporates who set up its hq here, and many more. When the Chinese developer and investment is in, executions will never be an issue.

http://www.theedgemarkets.com/en/article/iskandar-waterfront-holdings-proposes-share-swap-scheme-merge-listed-iwc

KUALA LUMPUR (March 8): Iskandar Waterfront City Bhd (IWC) announced a proposed merger plan with its major shareholder Iskandar Waterfront Holdings Sdn Bhd (IWH) through a share swap scheme.

The merger plan also entails proposed asset acquisitions of RM4.1 billion from four parties, including Tan Sri Lim Kang Hoo and Sultan Ibrahim of Johor, through issue of new shares and new redeemable convertible preference shares (RCPS).

The proposed asset acquisitions will enhance the merged entity’s revalued net asset value (RNAV) to RM4.50 per share or RM30 billion, with 7,367 acres of land bank excluding IWH’s equity interst in Bandar Malaysia project. IWH holds an effective 36% stake in Bandar Malaysia project.

The share swap scheme will be on the basis of one IWC share held for one IWH share. The latter will take over the listing status upon completion of the share swap, according to the filing with Bursa Malaysia this evening.

IWC's shares were last traded at RM1.64 before the stock was suspended from the trading last Friday. IWH shares will be valued at RM1.50 each, representing a 14% premium over IWC’s volume weighted average price of RM1.315.

With the latest plan, IWH, which had planned to unlock its land bank value through a new listing exercise since 2013, will not undertake an initial public offer.

This confirms the article entitled “IPO shelved, IWH to merge with IWC” published in The Edge Financial Daily on Tuesday.

IWC said it had signed a heads of agreement with IWH, which was represented by its controlling shareholder Lim, in relating to the proposed merger plan.

The proposed asset acquisitions are conditional upon the success of the merger plan. However, the two proposals are not inter-conditional.

According to the announcement, RCPS can only be converted into IWH shares when the company has generated a cumulative profit after tax of more than RM1 billion post restructuring exercise. However, IWH can redeem RCPS at any time without conditions attached.

IWH currently holds a 38.34% stake in IWC. Meanwhile, Lim owns 63.1% in IWH through Credence Resources Sdn Bhd.

If you look at the offer price then you will be fooled. The big picture is your 1 IWC share now is equal to 1 IWH share, and IWH owns 36% effective stake in Bandar Malaysia which has total GDV of RM150bn. So IWH share RM54bn, just for the Bandar Malaysia project. This is more than 8x of its market cap. They claimed the market value for the land bank is RM30bn, if you assume land cost made up 20% of the gdv (typically 5-20%), the entire gdv will be RM150bn for the group. This is how many times of eco world's total gdv? Of course I will not expect them to be as good as Ecoworld but Chinese developers will pay for the land and do the job, I believe

Long story short, if u buy iwc, u r basically buying a developer with 7400 acres of landbank in johor iskandar and Bandar Malaysia. IWH will be the largest developer in Malaysia in terms of market cap and land bank, and it will have all the supports from Malaysian government to turn Bandar Malaysia into a world class developement. After the consolidation, IWH will do fund raising to raise funds for the development. I reckon the market cap will hit rm10bn (initial Market cap is 4.3bn enlarged shares base x RM1.50 = rm6.5bn) within a year, no fund managers can avoid buying the stock. So what do u think?

Don't worry, guys. I think the weekly price adjustment is positive for petrol station operators as they wouldn't lose when consumer rush to pump cheap petrol every month end when price increase, leaving the petrol station operator holding higher cost of inventory when sales become weak in the first week of the month. In a nutshell, more timely cost pass through. The risk for severe price war is not too high as Malaysia is a saturated market which gives no reason to fight market share at the expense of profit.

I think the competition will be rationale and net effect from this policy shall be positive. In Australia where petrol price is free floated, the price difference between different operators is 1 cent. Personally, I don't think I will go for the cheaper petrol station just because of 1-2 cents difference. By patrolling around to find for the cheapest, you probably already lose more than 1 cent.

I think only the industry website will have, but u need to subscribe the service. Another indication is our petrol price that government release every month. Just like the Feb price where we have a petrol price hike even though the crude oil price was stable mom.

I think Shell will probably have good results too, but I prefer Petronm as Shell has much higher USD loan which will eat into its expanding margin when USD appreciate. Secondly, Shell only owns refinery which has a volatile earnings. What I like Petronm most is market value the co like an oil refinery even though it owns its petrol station network which is very profitable and stable biz where market gives a generous valuation, just like Petdag.

Hi, Jay

1) USD appreciation does have negative impact to them if they never do hedging. If you look through the past 10 quarters, the co tend to record unrealized, realized and derivative gain when USD appreciate. So that's the positive impact that I refer to. However, 4Q16 they report forex/derivatives loss, so I think the crude oil hedging derivatives was the culprit. Anyway, all these are well covered by the expanding crack spread and crude oil inventory gain in the quarter.

2) Tapis crack spread is the crack spread that Malaysian refineries use, according to him.

DKSH reported RM13.4m profit in 4Q16, +32.6% yoy & +146.2% qoq. This brings its full year 2016 profit to RM50.5m, +37% yoy. If we adjust the one-off impairment on receivables of rm15m in 2016, the full year core profit +70% yoy, translating to a record core profit of RM62m (13.4x FY16 PE). Since its inception, DKSH has never record core profit of more than RM60m p.a. This is literally a record year for the co!

As I expected, operating cash flow return to positive and the co closed the account with RM42.9m net cash as at FY16. I think this helps to clear the air as some investors were worry about the "deteriorating" cash flow in 3Q16.

Management's tone on 2017 outlook is upbeat vs cautious view on 2016 when IR reported its 4Q15 results last year. Organic growth for the revenue was at high single digit in 2016, after adjusting for the impact of change of clientele for telco prepaid card.

Going forward, the co is expected to continue to grow its revenue at mid to high single digit, while profit is expected to grow at 3x of its top line growth as I explained in my first article earlier. Assuming 20% core profit growth in 2017, DKSH is trading at 11x FY17 PE, or 8.2x PE if you exclude the net cash and net working capital (RM457m) as at FY16.

Again, for a distributor of healthcare and fmcg products, net working capital is as good as cash and that serves as a basis for the high teens PE multiples that most of the dominant distributor trading at, including DKSH Swiss which is trading at 20x fy17 PE.

By valuing the co at 17x FY17, the fair value would be RM8.00, translating to 52% upside from the current price.

I am happy with the performance indeed.

Just wait for the results, I believe my analysis is right.

Petronm and Shell Refining's share price was bashed down yesterday. Checking around and I can't find any reason except the news of new oil refinery to be built in Kedah which I think it is irrelevant as the new refined products are meant for export to China. I also read the comments among the forum members and I think I may offer my 2 cents on the stock.

Firstly, I must declared that I own some Petronm share for sometime. I believe the stock is significantly undervalued (I think the co can make rm200-300m profit a year in 2016 and 2017, which translates to 5-7x PE) as many investors (from what I observed in the forum) kind of confused or misunderstood the business model.

Petronm is an integrated downstream O&G player which owns the oil refinery (process the crude oil into gasoline/petrol fuel, jet fuel, kerosene etc) and the distribution network (petrol stations) to market its refined products to the consumers. Among the two, petrol station is the stable and profitable business where market tend to value this business like a concession. This is evident by the market valuation of Petronas Dagangan which has always been trading above 20x PE.

While for oil refinery, the profit tends to be volatile as the profitability depends on 3 key drivers, namely (1) crack spread (processing margin), (2) crude oil price which will have an impact on its inventory value, and (3) USD exchange rate.

Crack spread can be volatile as it depends on market supply and demand which I gather from my friend who is working in the industry that crack spread has been going up since Nov 2016. From what I understand, crack spread has improved from the avg of USD5/bbl in 3Q16 to USD7/bbl in 4Q16, and now at about USD8-9/bbl. in other words, Petronm's refinery margin will be stronger in 4Q16 and 1Q17 before taking into account the impact on its inventory gain/loss (sometime, overall refinery margin will be weaker even though crack spread remain the same as inventory loss due to lower crude oil price may eat into its refinery margin, this was what happened in 3Q16)

For the inventory gain/loss, like it or not, it is part and parcel of the oil refinery business as the refinery always hold some inventory (usually about 3-4 weeks inventory) to make sure the refinery has sufficient input material to process. Hence, when the crude oil price goes up, oil refinery will profit from the inventory gain, and vice versa. The good news for Petronm is crude oil price has been recovering from less than USD50/bbl in Sept16 to about USD55/bbl now. Hence, 2 out of the 3 key earnings drivers for the refinery biz are in Petronm's favour.

Lastly, we have to evaluate the impact of USD to Petronm's profitability. This is, in my view, the most difficult part to estimate. But if we take a cue from the historical trend, we can conclude that PetronM has a net long exposure on USD after taken into account its hedging position, As i noticed that Petronm always report net forex (both realized and unrealized) and derivatives gain when USD strengthen against Ringgit. Again, USD has been strengthening since Nov16 (+7% in 4Q16 vs 3Q16) which is another positive earnings driver for Petronm's refinery biz.

With all the key operating environments working in favor of Petronm, I would expect a record profit in 4Q16, and very likely a stronger profit in 1Q17 which serve as a key rerating catalyst for the stock. So what is the fair valuation for the stock?

Conservatively, we can assume 10x PE, a valuation between Petdag and Shell refining as it owns both of the marketing and refinery business which was separately owned by the 2 companies.

I think numbers should be good for DKSH Malaysia. But scanty disclosure make it hard to know the numbers for sure. We can take a cue from its attribution to non-controlling interest which implies stronger 2H16 (1H16: CHF2.0m vs FY16: CHF4.4m). But bear in mind there are other subsi which DKSH Swiss not owning 100%, although Malaysia Minority Interest should share the most, based on the historical trend.

DKSH Swiss reported good results yesterday and share price shot up 8%. A prelude to good 4Q16 results for DKSH Malaysia? http://www.dksh.com/global-en/home/investors/financial-results-and-presentations

Risk rider

You are right as the 1-2% net margin wouldn't change overnight and I don't expect it too. But I do expect 20 basis points margin improvement per yr based on my calculations, assuming 5-6% revenue growth. So 20 basis points to 1.00% net margin equals to 20% growth.

DKSH has net debt of rm345m 10 yrs ago vs rm19m net cash in 2015. So from now onwards, I would expect the co to pay more dividends. 9m16 was net debt of rm76m but I think this is atiming issue. Let's see 4q16, I would expect the cash return.

Tabula,

my belief of net working capital is as good as liquid as cash is based on
1) majority of the receivables should be due by modern on trade retailers such as Aeon/Tesco etc with the smaller exposure to mom&pop shops, which is the general retail market share between modern and traditional trade channel. So I think the big modern on trade retailers have very small risk to default. As I mentioned, past 5 yrs avg impairment per year is rm0.2m, this should be the basis to assume receivable risk instead of annualizing impairment in 9m16

2) inventory should be at their risk but unlike steel or commodity inventory which has volatile pricing, DKSH's inventory is mainly FMCG, healthcare products & telco prepaid cards. The only risk is shelf life risk (no shelf life for prepaid card so this segment got no risk). Past 5 yrs of avg inventory write off is only about 1.8% of its inventory value. So I think the inventory value can be easily realized over a month (typical inventory turnover cycle) with less than 2% discount, if historical trend is a guide.

For PE multiples, you are right as the high teens to 20x pe multiples include the net working capital. So if you want to compare like to like btw distributors, u should net of the working capital and net debt, to see the intrinsic value for its distribution network. And I forecast rm60m core profit for 2016 (9m16 done rm47m).

I tried to compare DKSH biz to its retail customers such as AEON, Caring etc to see what's the valuation difference after net of working capital. The answer is quite straightforward, the retailers are trading at more than 20x PE with low single digit margin (3-6%) as compared to less than 5x PE for DKSH (1-2% net margin) Well, many investors are annoyed by its 1% net margin, but I see it as an opportunity for operating leverage (obviously 3q16 was operating deleverage as compared to 2q16) as I believe fundamentally, competition among distributors is less severe than retailers.

Hence, I believe profit growth will resume once consumer sentiment recover. After all, the exposure for DKSH is similar to Aeon/caring and other retailers, i.e. Consumer spending. But the operating leverage is steeper for DKSH and valuation is a lot cheaper as compared to other retailers. Of cos you can also argue the retailers have properties hence deserve a higher valuation. But I would prefer asset light investment for smilar market exposure and growth.

Another thing to share here, I realized DKSH Swiss is a net cash co with about RM1.5bn as at Jun16. I wonder if they will take DKSH Malaysia private giving such cheap valuation (<5x PE ex net working capital ex net debt) and cheap ringgit. Not meant to speculate but I do see value proposition for the holding company who owns 74%. Assume to offer rm7.00 per share, it only requires less than rm300m.

Price still dropping on small volume, I was shocked initially when price plunged from 6.15 to 4.80 within 2-3 weeks. But frankly, I feel happy now as the current price offers me to buy a quality co at distress valuation. Been review my investment thesis after seeing price weakness continue, but the more I study, the more comfortable I am.

Thanks Paoblocrk. I am in the FMCG industry. Just sharing what I know and believe.

Hi, Paoblocrk. I am an accountant...

This is a misunderstanding, the co always mark up a margin for a product that they distribute, typically gross profit margin is about 8-9% and I think 9M16 gross profit margin is closer to 9-10% after the change of telco clients. So for rm5.5bn revenue, gross profit should be about rm495-550m. This profit is very certain. The co core operating cost was about rm400m in fy15, which management mentioned there were some startup cost for moving office and distribution centers. So the actual operating cost should be lower and the key is how do they manage the operating cost going fwd when revenue do not grow. If revenue continue to grow 5-7% p.a. (This is the 10 yr historical growth rate), the co will make additional rm21m-27m gross profit. If the co manage to control its operating cost which it seems to be stable, according to the recent quarter results, the incremental gross profit will flow to the bottomline. Well, some may ponder why the operating cost will not grow more than revenue. The logic is simple, you have a truck deliver 10 products to AEON JUSCO, next mth u secure new client or new product to distribute to the same channel. So do u think the cost will increase like the volume increase? The answer is no, u probably will only incur additional 60% cost for a dollar additional gross profit. That's the beauty of a distribution biz, the operating leverage is very good, as long as u can manage the operating cost which DKSH seems to be able to. Exceptional provision for doubtful debt is indeed bad to the p&l giving its thin net margin. But historical trend proved that the receivable risk is low, as I mentioned earlier, the avg provision for doubtful debt over the past 5 years was only rm0.2m per annum. So how can we call the biz model risky when it's revenue is in the billions.

This is a misunderstanding, the co always mark up a margin for a product that they distribute, typically gross profit margin is about 8-9% and I think 9M16 gross profit margin is closer to 9-10% after the change of telco clients. So for rm5.5bn revenue, gross profit should be about rm495-550m. This profit is very certain. The co core operating cost was about rm400m in fy15, which management mentioned there were some startup cost for moving office and distribution centers. So the actual operating cost should be lower and the key is how do they manage the operating cost going fwd when revenue do not grow. If revenue continue to grow 5-7% p.a. (This is the 10 yr historical growth rate), the co will make additional rm21m-27m gross profit. If the co manage to control its operating cost which it seems to be stable, according to the recent quarter results, the incremental gross profit will flow to the bottomline. Well, some may ponder why the operating cost will not grow more than revenue. The logic is simple, you have a truck deliver 10 products to AEON JUSCO, next mth u secure new client or new product to distribute to the same channel. So do u think the cost will increase like the volume increase? The answer is no, u probably will only incur additional 60% cost for a dollar additional gross profit. That's the beauty of a distribution biz, the operating leverage is very good, as long as u can manage the operating cost which DKSH seems to be able to. Exceptional provision for doubtful debt is indeed bad to the p&l giving its thin net margin. But historical trend proved that the receivable risk is low, as I mentioned earlier, the avg provision for doubtful debt over the past 5 years was only rm0.2m per annum. So how can we call the biz model risky when it's revenue is in the billions.

DKSH's market cap is about rm748m now. For a distributor, net working capital is always the major capital and also as liquid as cash. Anyone who wants to buy out the company has to take that into consideration. So if you minus the net working capital of rm489m (net of debt), the biz model valuation is only 4.3x Pe (rm748m - Rm489m)/ rm60m). So is that cheap enough for u? That is the basis of Distributors' valuation which has always been valued btw high teens and 20ish PE multiple. Remember, once a distributors is entrenched, it is very difficult for the new entrant to come in.

Reported pat + impairment net of tax = 5.4 + (9.7 x 70%) = 12. The tax rate is about 30% (2.3/7.7) in this quarter

You need to estimate the total receivables (estimate receivable turnover days/365 x sales), inventory and payables for the forecast revenue (fy15 sales + rm500m). Then get the net working capital required for this sales (receivable + inventory - payables), minus net working capital in previous year. For illustrative purposes, if I assume turnover days remain the same, the net additional working capital for RM500m new sales is rm39m.

I am so surprised that the sell down in DKSH is so steep. I think the irrational sell down is overdone. My 2 cents on DKSH's 3Q16 result

1) record high impairment of receivable (RM14.5m) in 9m16 shouldn't be viewed as a broad base bad debt, management has mentioned this is one-off in the quarter results so I think it is an isolated case/client. Why would I so confident on this non-recurring impairment? Well, if you look at their past 5 yrs impairment on receivables, the avg impairment p.a was only RM0.2m (Don't just take my word for it, you can verify the numbers by checking its past annual reports). So I am not too concern on this impairment charges.

2) Profit is not that bad after you exclude the one-off impairment, which comes to about rm12m, as compared to RM4.5m in 3Q15. In terms of qoq, the profit is indeed a lot lower (2Q16 pat ex impairment = rm23.9m). This is mainly due to the 7% qoq revenue contraction. In absolute amount, revenue declined by rm98m qoq. Assuming 9% gross profit margin, the lost of profit is rm8.8m. So this adds up to rm20-21m quarterly profit if the revenue sustain at rm1.35bn, which is a consistent revenue base since 4Q15, before coming off in 3Q16.

3) Cash flow seems to deteriorated rapidly with many investor pondering where the cash has gone? Obviously, the cash lock up in working capital (receivables & inventory) after the sales disappointed. It would probably normalize in next quarter. If you noticed, the co's net cash position is always very volatile from quarter to quarter but the fact is, it has been in net cash since full year 2013.

In conclusion, DKSH's 3Q16 results was not very good, but definitely not in a crisis. If you exclude the rm14.5m impairment in 9M16, the co reported rm47m pat. If it makes another rm13m in 4q16 (+30% yoy), the co will probably match its record core profit of about rm60m in 2013 and 2014. Bear in mind, DKSH share price traded above rm8.50 in March 2014. Price has came off subsequently but avg traded price throughout 2014 was still above RM7.00.

Hence, it really doesn't make sense to see the price continue to trend down from current level. If revenue recover to 1.35bn per quarter, I think the profit will be closer to rm20m level.

Feel free to comment but appreciate constructive feedback. Thanks.

I am so surprised that the sell down in DKSH is so steep. I think the irrational sell down is overdone. My 2 cents on DKSH's 3Q16 result

1) record high impairment of receivable (RM14.5m) in 9m16 shouldn't be viewed as a broad base bad debt, management has mentioned this is one-off in the quarter results so I think it is an isolated case/client. Why would I so confident on this non-recurring impairment? Well, if you look at their past 5 yrs impairment on receivables, the avg impairment p.a was only RM0.2m (Don't just take my word for it, you can verify the numbers by checking its past annual reports). So I am not too concern on this impairment charges.

2) Profit is not that bad after you exclude the one-off impairment, which comes to about rm12m, as compared to RM4.5m in 3Q15. In terms of qoq, the profit is indeed a lot lower (2Q16 pat ex impairment = rm23.9m). This is mainly due to the 7% qoq revenue contraction. In absolute amount, revenue declined by rm98m qoq. Assuming 9% gross profit margin, the lost of profit is rm8.8m. So this adds up to rm20-21m quarterly profit if the revenue sustain at rm1.35bn, which is a consistent revenue base since 4Q15, before coming off in 3Q16.

3) Cash flow seems to deteriorated rapidly with many investor pondering where the cash has gone? Obviously, the cash lock up in working capital (receivables & inventory) after the sales disappointed. It would probably normalize in next quarter. If you noticed, the co's net cash position is always very volatile from quarter to quarter but the fact is, it has been in net cash since full year 2013.

In conclusion, DKSH's 3Q16 results was not very good, but definitely not in a crisis. If you exclude the rm14.5m impairment in 9M16, the co reported rm47m pat. If it makes another rm13m in 4q16 (+30% yoy), the co will probably match its record core profit of about rm60m in 2013 and 2014. Bear in mind, DKSH share price traded above rm8.50 in March 2014. Price has came off subsequently but avg traded price throughout 2014 was still above RM7.00.

Hence, it really doesn't make sense to see the price continue to trend down from current level. If revenue recover to 1.35bn per quarter, I think the profit will be closer to rm20m level.

Feel free to comment but appreciate constructive feedback. Thanks.

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