DKSH: Damn the tropedoes, full speed ahead!

Last week, I posted on Dsonic and its fantastic rise. This week, I shall look at another stock starting with the alphabet, D: DKSH. If Dsonic was a stud from day 1, DKSH has been a dud forever and ever... until early 2013.

We can see from the 2 weekly charts below how DKSH broke above the psychological RM1.00 level in May 2011 and rallied to RM2.35 in November the same year. In January 2013, DKSH broke above the 2011 high and it has been rising ever since. Yesterday, the stock close at RM8.48.


Chart 1: DKSH's 5-year weekly chart as at Mar 20, 2014 (Source: Tradesignum)


Chart 2: DKSH's 3-year weekly chart as at Mar 20, 2014 (Source: Tradesignum)

Background

DKSH is owned indirectly by DKSH Ltd. also known as DiethelmKellerSiberHegner, a Swiss Market Expansion Services Group. with headquarters in Zurich. From Wikipedia, we learned that the DKSH group "offers any combination of sourcing, marketing, sales, distribution and after-sales-services and is organized into four Business Units: Consumer Goods (including the Business Segment Luxury & Lifestyle), Healthcare, Performance Materials and Technology". (here)

Market Expansion Services, which DKSH group provides, include marketing, sales force management, distribution and logistics, invoicing and credit management, inventory and returned goods management.  

Below is the price chart of DKSH Ltd (Code: DS5) as traded in the Frankfurt Stock Exchange.
 

Chart 3: DS.5's weekly chart as at Mar 20, 2014 (Source: Yahoo Finance)

Historical Financial Performance

I have appended below the table of DKSH's financial performance for the past 16 years. We can see clearly that DKSH's earning started to rise in 2008. This coincided with the expansion in its net profit margin from an abysmal 0.03-0.04% in FY08/09 to 1.64% in FY12 & 3.44% in FY13. While 2-3% net profit margin may not be substantial but against a revenue of RM5 billion, it translates to an earning of RM100-150 million per annum. For a company with outstanding shares issued of 157 million , that means an earning of 64-96 sen!


Table: DKSH's last 16 years results


Chart 4: DKSH's last 16 years results

But...

However, I must point that the net profit for FY13 was bumped up by 2 exceptional one-off gains: RM97.3 million from sale of property & RM8.6 million from sale of DKSH Transport Agencies. If these exceptional gains are excluded, DKSH would report a lower net profit f RM69 million for FY13 as compared to RM78 million in FY12. The smooth rise in the profit numbers and the net profit margin would instead show a kink.  Is the adjusted net profit number a one-off disappointment? Or, has DKSH just crossed a tipping point? We will wait & see.


Chart 5: DKSH's last 16 years adjusted profits and net profit margin

Market Reaction

Despite the rising valuation and this 'poorer' result announced on February 26 (masked by the 2 exceptional one-off gain), the share price didn't miss a beat and continue to march higher. See the daily chart below.


Chart 6: DKSH's daily chart as at Mar 20, 2014 (Source: Tradesignum)

Valuation

Adjusted for the one-off gain, DKSH's EPS for FY13 would be 44 sen. Based on its closing price of RM8.48 yesterday, DKSH is trading at a trailing PE of 19.3 times. For a trading business, DKSH is now trading at very demanding PE multiple.

Conclusion

Based on 'poorer' result and demanding valuation, I would rate DKSH as a SELL INTO STRENGTH.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of,DKSH.