We came away from our recent meeting with DKSH feeling reaffirmed on its future growth prospects. This is mainly underpinned by the expected recovery in the consumer spending following the reopening of business activities in the economy. In addition, we believe that the favourable product mix and better operational efficiencies will continue to support DKSH’s profit margins moving forward. We maintain our Outperform call on DKSH with a higher TP of RM6.00 (previously RM5.00) based on an 11x multiple to FY22F EPS. We ascribe a slightly higher multiple to its 5-year historical average of 10x as we are anticipating better earnings growth on the back of higher net profit margins, mainly due to better operational efficiencies and the stronger profit contribution from its own brands. We are forecasting an average net profit margin of 1.2% for FY21-23F as compared to its 5-year historical average of 0.8%.

• Anticipating stronger sales going forward. We are expecting demand for Marketing and Distribution (M&D) segment to improve in 2HFY21, following the gradual reopening of the economy as more than 80% of Malaysia’s adult population has been fully vaccinated. This should also bode well for the distribution channels for the hotels, restaurants and cafes (Horeca) segment that was affected by the Covid-19 related movement restrictions. While the distribution for the healthcare products has been negatively affected by the lower footfall in hospitals, we think that patient volume will likely to pick up post reopening.

• Favourable product mix and improved operational efficiencies to maintain profit margins. DKSH is slowly reaping the benefits from its internal efficiency project, which saw its 1HFY21 EBIT margin improve to 2.3% from 1.6% in 1HFY20 given the better operational efficiencies. In addition, the better margin mix given the higher contribution from its in-house brands should continue to support its M&D segment margins. Moving forward, DKSH remains committed to further improve on its operational efficiencies and working capital management.

• Outlook. While 3QFY21 will likely be weaker QoQ due to seasonality, we are expecting consumer demand to pick up in 4QFY21 amid festive spending. Meanwhile, we understand that the group is looking to take advantage of the lower interest rate environment by paring down some loans that it took to finance for Auric’s acquisition previously. As such, it should likely translate to lower finance cost moving forward.

Source: PublicInvest Research - 28 Sept 2021