DSG International (Thailand)

DSG International (Thailand) Plc (DSGT)

 

Investment thesis

DSGT’s FY14 outlook took a considerable hit when the 40% dive in the world oil price between June and December 2014 had a greater-than-expected impact on Malaysian consumer spending sentiment. However, we expect that sentiment to see measured gains in 2H15 in anticipation of an oil-price recovery, despite the weak price environment continuing to subdue the firm’s outlook over the next few months. On valuation, its share price is also trading at an undemanding valuation—0.5SD below its long-term mean, the lowest level it has plumbed in two years. 

Pressure to remain for next few quarters … 

Sales in Malaysia, accounting for one-third of total revenue, have weakened since 2H14 as a result of the sharp drop in oil price. For the full year, the drop amounted to 3.7%, bringing down overall top-line growth to 9.6% YoY versus the 12% YoY growth posted for 2013 and the 20% CAGR for the 2010-13 period. As the oil price will likely stay at its low level and the inherent unfavorable business environment in the country will continue, we anticipate slowing sales growth conditions with weak GM and high selling expenses throughout 1H15. Moreover, the Thai market remains challenging amid a lack of revival signs in the economy and slack internal/external demand. Despite that, our FY15 conservative assumption of 12% YoY growth in the local arena appears achievable (albeit lower than 2014’s 16% YoY).  

… with a forecast cut, but recovery in 2H15 remains intact ...    

We see DSGT’s FY15 outlook in two parts. First, 1H15’s earnings should still soften as a consequence of the weak Malaysian market. To fine-tune the call bearing in mind the forecast for sluggish sales in 1H15, we have conservatively trimmed our sales growth assumption; and slashed our NPAT projections for FY15-16 2% and 6% to Bt509m and Bt591m, respectively. Second, as our house view expects the oil price to recover in 2H15, DSGT’s earnings outlook will have then improved on expanded Malaysian consumers’ spending. There will also be scope for GM to beat our conservative assumption of 35%—if Malaysia recovers sooner than we have modeled. The firm’s GM has historically averaged 35.5% during 2006-13 compared with 34.4% during 2H14, when the market felt the weight of the oil-price slump. 

... and Indonesia poses long-term earnings boost 

Indonesia will still have scope for upside in the long term. We currently assume top-line growth in that market of 50% this year and 40% 2014-17 CAGR, quite conservative compared to management guidance—which foresaw doubled growth over the next few years. Contribution from Indonesia will gradually rise to 6% in FY17 (from 3% currently) under our assumption. However, there is scope for further upside from Indonesia based on the firm’s target. The market could contribute as much as 15% of revenue within FY17, and the firm should deliver NPAT growth of 21% CAGR FY14-17, greater than our 17% CAGR estimate.