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Monday, December 24, 2018

DKSH to see synergies from Auric Pacific purchase

Monday, 24 Dec 20189:00 AM MYT

Bhd's proposed acquisition of Auric Pacific (M) Sdn Bhd could be positive for the company due to the potential synergies through the extension of its client portfolio base, cross selling and expansion of its product range.

"The proposed acquisition will enable DKSH to increase its market share in the market expansion services industry in Malaysia and provide opportunity to grow its position in the fast-moving consumer good (FMCG) segment.

"This also represents a gateway for DKSH to increase its product and client portfolio base. We understand that Auric serves the food services channel for hotels, restaurants and cafes as well as distributes leading butter brands like Buttercup and SCS," said PublicInvest research.

It upgraded the stock to outperform while cutting its target price to RM3 due to DKSH's recent heavy selldown following its exclusion from the Shariah-compliant list.

The research house said the S$157.7mil (RM480.9mil) purchase of the entire equity interest in Auric Pacific is expensive at about 18x price-earnings although the price could be justified due to the purchase target's high profit margins of 7% compared to DKSH's 1-2%.

"In the past 3 years, Auric was able to achieve net profit margin of 3-7% while year to-date FY18 was about 8%. It posted an annual net profit of c.RM20m, which is more than 35% of DKSH’s projected earnings," said PublicInvest.

It added that if the purchase is full funded by bank borrowings, there would be a neutral to slightly negative impact on DKSH's bottomline in the immediate terms due to higher interest expense while synergies may only be created in the medium to long term.

"Meanwhile, funding should not be an issue given its low gearing. Assuming acquisition is fully funded by borrowings, its net gearing is expected to go up to 0.9x."


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