Swiss company DKSH Holding AG (DKSH) belongs to consumer services industry and operates in 36 markets. The company develops its business through operational excellence, cost discipline, M&A and digitization. It promises to “Deliver growth in Asia and beyond”.
DKSH has the following four business units:
Healthcare – registration, marketing and sales of products covering pharmaceuticals, consumer health and medical devices.
Consumer Goods – product feasibility studies, marketing and sales of fast-moving consumer goods and luxury and lifestyle products.
Performance Materials – development, marketing and distribution of specialty chemicals, food and beverage, pharmaceutical and personal care products.
Technology – marketing, sales, distribution and after-sales services of capital investment goods and analytical instruments in the areas of industry, infrastructure, energy, research, food, beverage and advanced materials.
The company intends to increase outsourcing to grow in Asia. Acquisitions contribute significantly to the growth.
Dividend Revenue Profitability Financial Strength Investment Case
Dividend
| Dividend | Dividend Yield | Growth p.a. | PayOut Ratio |
| CHF 2.05 per share | 2.6% | 5Yrs: 6.45%; 1Y: 5% | 59% |
| Dividend Policy
DKHS Holding pursues progressive dividend policy. Over the last 5 years dividend has increased by 6.4% per year on average. In 2021 growth was 5%. |
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| Sustainability
With payout ratio below 60% the company’s dividend is well covered by earnings. Free cash flow grew by 24.5% to CHF 0.262B. The amount paid in dividends was CHF 0.133 B. That means that free cash flow covers dividend at 1.9x. So, dividend is safe and reliable. |
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| Future Growth Estimate
Looking ahead the management intends to continue with progressive dividend policy. Although the future growth of dividend could be limited by the potential growth in profitability. |
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Revenue
| Revenue | Revenue Growth | Revenue growth in 2021 | |
| CHF 11.1B
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5Y Growth 1% p. a.
1Y Growth 3.4%
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By divisions:
Healthcare 3% Consumer Goods -0.5% Perform. Materials 15.6% Technology 12.5% |
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| Revenue growth
In the pre-covid years sales grew in a smooth and consistent way. Thereafter the revenue has been volatile. These resulted in the average growth of 1.07% per year. In 2021 sales growth accelerated to 3.4%. Organic sales increased by 4.6% and were up across all business units. Business units performed as follows last year: · Healthcare – despite the impact of Covid-19 in Asia the company expanded its outsourcing services and business development. DKSH closed the acquisition of MedWorkz in Singapore and Hahn Healthcare in Australia. The unit has diversified portfolio and expands its digital channels. · Consumer Goods – revenue was slightly lower than last year despite higher demand for Luxury and Lifestyle products. The Swiss watch brand Maurice Lacroix improved results further. · Performance Materials – despite supply chain constraints the unit reported double-digit sales growth over year. It focused on digital marketing and offered value-added services. In 2020 it successfully integrated acquired companies and expanded client base. The industrial business increased sharply. Also DKSH acquired companies in Australia, China and Spain to further consolidate the specialty chemicals distribution industry. · Technology – DKSH acquired the company Bosung in Korea. Sales were up due to that acquisition as well as organic growth. The business unit focuses on growing segments like scientific instrumentation, precision machinery and after-sales services. eCommerce net sales have grown double-digit and exceeded CHF 0.3B (CHF 0.2B last yar). Revenue has grown in the consistent way in the pre-covid years. So the revenue should grow in the same consistent and smooth way in the future as soon as a global economy returns to some form of normality. |
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Profitability
| Profit | EPS Growth | Net Profit Margin | ROE |
| EPS CHF 3.45
Net Profit CHF 0.23B |
5Y Growth 1.4% p. a.
1Y Growth 42.5% |
2% | 12% |
| The company’s EBIT reached CHF 0.285B, 10.5% higher over year. EPS growth was exceptional after a decline in 2020.
Consumer Goods unit improved profitability substantially. EBIT growth of 30% was supported by the transformation of the Fast-Moving Consumer Goods business. Performance Materials unit also posted double-digit EBIT growth, 26%. EBIT in Technology unit was 3% lower over year and in Healthcare unit almost flat.
2 – excluding segment “Other” |
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| EPS growth assumption
For 2022 DKSH expects EBIT above last year assuming economic growth in Asia Pacific. EPS has been highly volatile over the last 5 years. After a spike in earnings in 2021 any further earnings growth will probably be somewhat moderate. |
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Financial Strength
Company Capital Structure
In EUR B
| Year | 2020 | 2021 | |
| Equity | 1.737 | 1.809 | |
| Cash & cash equivalents | 0.681 | 0.593 | |
| Debt including lease | 0.566 | 0.587 | |
| Debt/Equity | 33% | 32% | |
| Sustainability
The company is essentially debt free as its cash exceeds the financial debt. |
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Investment Case
The estimate of future stock price and investment returns based on P/E ratio
| Assumptions of dividend and EPS growth over the next 5 years | ||
| In our model we assume the growth of both EPS and dividend to average around 3% in the coming 5 years. So the total dividend income over the next 5 years would amount to CHF 11.21 and EPS in 5 years will be CHF 4 per share. | ||
| Projected stock price | ||
| Average P/E over the last 5 years (21.98) multiplied by EPS in 5 years = 21.98 x CHF 4 = CHF 87.91 | ||
| Future Returns Based on the Assumptions | ||
| Stock price upside potential 9.6% from the current price CHF 80.2
Overall return on investment* 23.6% Compound Annual Return on Investment 4.3% |
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*- Includes the expected dividend income over the next 5 years and dividends are not reinvested.
DKSH has a robust business model, large share of daily consumption items and strong balance sheet to capitalize on growth in Asia. The expected return on investment is not high and that is in line with overall low risks associated with the company.
Disclosure:
I have no position in the stocks mentioned in this article and do not intend to initiate any position within the next 72 hours.
Notes
Data source – the company’s financial reports and presentations. Source of pictures – the company website unless otherwise stated. Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation. There are many ways to estimate the future stock price. We use only one of them, the one based on P/E ratio. All estimates made in the article are for the informational purposes only. No taxation, brokerage fees and other expenses related to investing are considered in the estimates. The estimates are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article only as a starting point for your own due diligence.