DSG International (Thailand)

DSG International (Thailand) Plc (M) 

Investment thesis

Sales in Malaysia, which comprises 35% of DSGT’s revenues, have been hit by consumer spending in that country (as a result of the slump in commodity prices, especially oil). Moreover, price-led competition has intensified, squeezing GM and increasing marketing expenses. There are no forward indicators of oil prices recovering within the next three months. As such, we have cut our GM assumption, so our earnings forecasts decline. However, we still expect DSGT to deliver an NPAT CAGR of 15% for FY14-16. Thus, our BUY rating stands with a downsized YE15 target price of Bt9.00 (previously Bt11.60).

Malaysian consumer spending has weakened …  

Consumer spending in Malaysia has declined in tandem with the slump; in commodity prices (including crude prices). The World Bank recently cut its 2015 GDP growth forecast for Malaysia from 4.9% to 4.7%, due to diminished expectations for export growth, investment in the oil & gas industry and private consumption. 

…prompting price competition, which has squeezed GM

The prevailing unfavorable business environment has prompted price-cutting and heavy promotions among non-durable consumer goods brands as they jockey to maintain market share. DSGT has been forced to join in, so its GM has been squeezed and its marketing expenses have increased.     

The next few months look set to be subdued   

BLS expects oil prices to stay low (and probably drop further) through much of 1H15. Therefore, the Malaysian consumer market is likely to remain under pressure until the prices of oil and other major commodities (including soft commodities) start to recover. As such, under our base-case scenario, we assume that GM and marketing expenses will remain at current levels throughout 1H15, due to intense price competition and weak consumer demand. But there would be scope for GM to beat our conservative assumption if Malaysian consumption spending were to recover sooner than we have modeled. 

Forecasts downgraded, but growth outlook remains impressive

We have cut our profit forecasts for FY14-16 by 25%, 30% and 28%, respectively, due to lower GM assumptions as a result of intense price-led competition in Malaysia. Heightened competition both squeezes GM and increases sales expenses, as the firm has to spend more on marketing in order to hold market share. So, we now assume that sales expenses will equal 23% of sales in FY15-16 (we previously assumed 21%). However, we forecast an NPAT CAGR of 15% for FY14-16, so our BUY rating stands with a YE15 target price of Bt9.00, pegged to a PER of 22x (the mean of readily comparable peers).