DKSH Malaysia got a one time boost with its 2019 acquisitions

[i4value]

2019 was a crucial year for the Bursa Malaysia DKSH. It acquired Auric Pacific that had a strong presence in the food service channel. It also covered chilled and frozen products in both food service and grocery channels.

The acquisition boosted DKSH revenue growth. Furthermore, returns that were declining for some time seemed to reach the bottom in 2019 and began to improve. But these improvements seem to be tapering off suggesting that the 2019 acquistion was a one-time boost.

The positive sign is that there is more than 30% margin of safety at the current market price. These suggest that if you are going to invest in DKSH, it should view it as a cigar-butt investment rather than investing in a compounder.

[weijian]

hi i4value,

In general for a distributor, the capital efficiency and business economics will be determined by its working capital. The composition of the working capital (and how it funds it) will determine the capital efficiency, and then how fast it turns its inventories may help it to scale up really fast and have good business economics.

As the improvement post-2019 and the "valuation discount" looks interesting from your article, I took a quick look:

(1) Working Capital: The payables and receivables almost roughly cancel out each other and so the working capital is exclusively made up of inventories (which makes up 100% of equity value). So in this case, inventories is the key here and it turns at ~45days. This is actually pretty fast and may be part of the reason for it been able to earn a return above WACC. I have looked at distributors that takes ~100days or more (engines, tyres etc) to turn inventories and generally they will be "stuck" in a low-med single digit ROE. If they have to use debt to fund inventories/receivables consistently, then it is even worst off. DKSH doesn't seem to have a red flag here.

(2) The Capital Allocator:
- I think the low cash is a feature rather a bug. It may speak something about its ability to secure large trade financing and surely beats a distributor that needs "lots of cash" on the BS. So to me, low cash is a positive instead.
- The purchase of APB, a manufacturer (brand owner too?) improves GPM is expected too. It is financed fully by debt I suppose and from the metrics in your analysis, it looks accretive. Looking good here too. But any time one is on the other side of the trade with the Lippos, they have to watch their back to see where is the catch.

(3) Structure: The Swiss owns 75% of the company and there isn't anything out of the ordinary in terms of related party transactions. For example, https://www.valuebuddies.com/thread-11076.html --> this would be an immediate show stopper (for me). For the ultimate owners to benefit, DKSHM have to keep declaring dividends upwards, and OPMIs will benefit. I would also assume this company is not politically connected too.