Business and evolution
Dickson Concepts Ltd. (HKSE:00113, Financial) is a small retail chain with a capitalization of just $176 million, listed on the Hong Kong Stock Exchange, but its shares can also be acquired on the American OTC market and also on the Frankfurt Stock Exchange. The business generates more than 70% of its sales in Hong Kong, but also operates in Taiwan, China, Singapore, Malaysia and Macao through more than 100 distribution stores.
Its sales are divided almost equally into three areas:
1. Fashion and accessories that generate 37% of its turnover.
2. Watches and jewelery that generate 31% of its turnover.
3. Cosmetics and beauty that represent another 31% of its turnover.
Dickson is focused on the distribution segment of luxury goods and accessories. It distributes its own brand of watches and jewelry along with other fashion brands such as Tommy Hilfiger, Tommy Jeans, Hogan and Dupont lighters, and other accessory brands such as Bertolucci, Christofle, Chopard and Tod's.
A few months ago, it signed a strategic collaboration agreement with fashion firm Harvey Nichols, which has an important presence in e-commerce, where Dickson wants to increase distribution of its products.
Dickson Concepts was founded by Dickson Poon, its current president and first shareholder of the company, in 1980. Throughout the company's history, it has acquired many brands and retail companies. In 1987 it sold the ST Dupont brand and in 2005, it made one of its main acquisitions, Swiss watch distribution company Bertolucci. For more than 20 years, it was the primary distributor of Polo Ralph Lauren in Asia, until 2009, when its license ended and it became a distributor of Tommy Hilfinger and others in Asia.
Basic data of the company (according to Hong Kong Stock Exchange):
Number of shares: 407,713,308
Capitalization: $176 million
Net cash and short term investments: $236 million
Enterprise value: -$60 million
Net profit: $18 million
Operating cash flow: $30 million
P/OCF = 5.8
ROIC= 22.1%
Dividend yield = 6.8%
Businesses evolution and financial strengths
Dickson's sales in 2018 (the fiscal year ends on 31 March) grew by 15.6% thanks to a strong increase of 18.6% in comparable sales. Hong Kong generated 76% of global sales and Taiwan captured almost 18%, having increased the number of stores by 7% to 107. Operating profit and earnings per share grew 86% last year to 0.392 Hong Kong dollars, reaching a profit of 151 million Hong Kong dollars. It also increased its distributed dividend from 0.17 to 0.231 Hong Kong dollars.
Despite the strong performance completed in March 2018 and the business improvement in Hong Kong, China and Southeast Asia, the company wanted to be cautious about the possible threat of trade war between China and the U.S. It is also concerned with the pressure on its operating margins due to competition from operators online, which led it to sign a strategic alliance with Harvey Nichols to take exhaustive control of its costs and expenses at all levels in addition be very cautious with its expansion plan.
These expectations, communicated in his last annual report, created a certain caution in the value, but we think that there are other aspects that are more important and that make this company interesting as an investment strategy in the medium or long term.
After the publication of the 2018 results, the company's stock rose significantly on the market to close to 4 Hong Kong dollars. Later, a period of consolidation corrected to the zone of 3.2 Hong Kong dollars, which coincided with the maximums it set throughout 2017 and which it did not manage to break until it published 2018 results. On Thursday, Nov. 8, Dickson announced that its results for the six months to September (first half of fiscal 2019) were going to be significantly higher than the previous year. We think this will provide a new impetus for shares to reach at least the highest seen in June after publishing its 2018 results. Later, we thought that if the company made a significant purchase we could see a significant rise in the course of next year, as we are buying the business practically for free.
In this graph from GuruFocus, we can see how since 2011 the stock market capitalization of the company has declined to just $137 million from $256 million, although the company has been generating cash flow that has allowed it to pay its shareholders an attractive dividend and double the cash and short assets to about $240 million from $120 million. The value of the company is now half despite having generated as much cash in the last seven years as it capitalizes on the stock market today. Right now, we would buy a business for $137 million that is profitable and has good prospects, and we receive $92 million more in cash. So, we buy the business for free, and they pay us almost 50% of their NCAV.
Dickson has accumulated significant liquidity that allows it to have an investment area to seek new investment opportunities in major international markets. The company has more than 1.60 billion Hong Kong dollars in net cash and short-term investments, which will allow it to take advantage of any change in market conditions, look for new investment alternatives to diversify the income and increase the organic and inorganic sales in an unquestionable way withint three to five years.
The company has a high return on capital employed in terms of ROC (44.2%). To maintain this return, the company has a clear strategy of cost reduction, seeking opportunities to improve its agreements to compete with online operators and analyze possible acquisitions to avoid or minimize the risk of deterioration in margins by stronger competition.
Management and shareholders
The company's president and largest shareholder is its founder Dickson Poon. The president and board of directors own more than 50% of the company's shares, which guarantees that the company's interests will be aligned with those of its shareholders. In addition, Dickson is being very generous with its shareholders by distributing in annual dividends a return that is currently almost 7% and also repurchasing shares. Since September, the company has repurchased almost 6 million shares (1.5% of the existing shares in two months), and more than 4 million of these shares have already been redeemed.
Dickson Poon is a successful businessman and also owner of Tommy Hilfiger Asia-Pacific, non-executive chairman of Harvey Nichols, owner of a film production company and a contributor through charities in higher education, having donated important sums of money to St. Huges College of Oxford and King's College of London.Â
The Brandes International Small Cap Fund is the largest institutional client in Dickson, owning 11 million shares or about 3% of the company.
Valuation
Dickson is currently worth 1.29 million Hong Kong dollars on the stock exchange and has net cash over 1.60 million Hong Kong dollars. It is a small company with capitalization of 176 million Hong Kong dollars, but has more than 230 million Hong Kong dollars in cash. It has no debt, which means that we would be buying the business at a negative enterprise value of -60 million Hong Kong dollars.
We also bought a growing business that is profitable and had strong fiscal 2018 results (with a strong increase expected in 2019). The valuation ratios would be as follows:
PER 18 * 8
P/FCF 18 * 5
Book value 18 *0.58
Price/sales 18 *0.35
And it would be trading at a 40% discount to its NCAV, the value of liquidating all of its short-term net assets and paying off all of its debts and payments to suppliers.
The company pays a strong dividend, with management that aggressively buys back shares to later amortize them, improves the earnings per share and assures future investments and improvements in its business due to the solid cash-filled balance that practically guarantees growth for the shareholder in the coming years.
Valuation model
In the valuation model, we assume a sales growth scenario of 14% per year, as a result of the current positive trend in consumption. This is reinforced in the coming years by possible acquisitions and investments in the business at a rate of 200 million Hong Kong dollars per year, which will allow it to return to the 6% Ebit margin achieved in 2012 and 2013 and a 12% tax rate (below the 16.5% applied in Hong Kong) due to tax credits for losses generated in 2015 and 2016.
We projected a price-earnings ratio of 10 and P/FCF target of 9 (due to the cyclical component of the business) an EV/Ebitda of 6.5 and EV/Ebit of 7.5. These ratios are more than conservative, offering a target three-year internal rate of return of between 36% and 42%, plus the additional dividend yield offered by the shares, which is currently 6.8%.
Risks
The main risk in Dickson Concepts would be a possible slowdown in consumption. The company has suffered falls in its turnover cyclically, but after two years of decline as suffered in 2016 and 2017, which usually follow periods of between three and five years. This usually gives a recovery. Although an economic crisis in the region or at a global level would affect its sales, it would also generate a purchase opportunity for the company to invest the enormous liquidity it has, so a period of crisis could be favorable for the company.
Some brands that are perceived as luxury over time may no longer be perceived as such, dropping margins and forcing sales to be maintained by reducing prices. Dickson is trying to reduce this by diversifying its brands and target segments. The main solution Dickson can provide is the enormous liquidity it has to improve efficiencies and make acquisitions.
Outlook and conclusion
Dickson's future will be linked to the possible use it will make of its gigantic net cash -- a net cash that exceeds its market capitalization and that will allow it to invest in strategic agreements for a better distribution of its products and make some acquisitions that are logical and best. But knowing that Dickson's president is a businessman with a great business vision, it is certain that he will defend the best interests of his shareholders in the long term using that liquidity in the best way.
While we wait for the use of that mountain of liquidity, the best news we have is that the company is being generous with the shareholders and paying large dividends, repurchasing shares. The best news is that its current businesses are growing at a good pace for a year and are beating the expectations of the company itself. Therefore, we think we could not be facing a better investment opportunity.
On Nov. 29, the company will publish its results for the first half of the fiscal year, a first half that the company has already anticipated will show a significant increase in earnings due to the growth in sales volumes and the control of costs and operating expenses while continuing to look for new opportunities to diversify profits.
We will wait for the publication to see if we have more clues about how that growth has been, what future prospects it has, whether it will pay new dividends or continue to buy back shares and how its search for new companies to invest in to diversify its businesses will evolve.
