DK Leather Corporation Bhd - TA Online

TA Securities Bhd
20 May 2004
N E W L I S T I N G
TA SECURITIES BHD
Participating Organisations of
Malaysia Securities Exchange Berhad
RM1.06 (-3.6%)
Fair Value
KLCI 793.83
SHARE INFO
Stock Code
DKCORP
Listing
Main Board
Enlarged Share Cap (m) 300
Market Cap @ RM1.06 (RMm) 318
Par Value (RM) 0.20
IPO/Offer for sale/Placement (m) 35.15
Issue Price (RM) 1.10
Estimated Free Float (%) 25.6
Listing Date
21-May-04
Major Shareholders (%)
DK-MY Holdings S/B - 45.00%
Koek Tiang Kung - 9.30%
RATIO & ANALYSIS
NTA/shr (Post IPO) (RM) 0.26
Price to NTA (x) 4.1
ROE - '03 (%) 32.2
- '04 (%) 28.5
ROA - '03 (%) 20.2
- '04 (%) 19.8
Net Gearing
(x) Net cash: RM15m
UTILISATION OF IPO PROCEEDS
(RMm)
Repayment of borrowings 7.0
Working capital 8.3
Estimated listing expenses 2.0
20 May 2004
Sector : AUTO Bloomberg : DKC MK For Internal Circulation Only
DK Leather Corporation Bhd
The Leader in Leather
DK Leather Corporation Bhd (DK Corp) is a market leader in automotive
leather upholstery, with a highly diversified customer base comprising
both local and foreign players. Thanks partly to its experienced
management and international expansion, profit margins have
consistently grown from FY2000 to FY2004, resulting in compounded
net profit growth of 49.2% over this 5-year period. However, share price
may be affected by the bearish cloud of sentiment hovering over autorelated
stocks, which are currently trading at only 9.2x CY04. Given
its diversified earnings base and consistent growth, we are fairly
valuing the stock at a 30% premium to sector PER. Despite the
generous premium, however, our fair value of RM1.06 is still some
3.6% below the IPO price of RM1.10.
Company Background
The principal activities of DK Leather Corporation Bhd (DK Corp) are
manufacture, assembly, installation and retail of automotive leather
upholstery, mainly seat covers and accessories like steering wheel and gear
knob covers. Its products are marketed under the brand names "DK-
Schweizer", "KK Best" and "Tomo Leather". However, the group is a Tier-2
supplier in that they supply to Tier 1 suppliers, who then supply directly to
the car assemblers. Yet the choice of which Tier-2 supplier to source from
depends on the assembler and not the Tier 1 suppliers.
Production Base
The group currently operates 5 plants in Selangor and 1 plant in Singapore,
as well as 9 retail outlets located in KL (3), Penang (2), Australia, Singapore,
US and Netherlands (1 each). Its principal products are automotive leather
seat covers, steering wheel covers, door panel side pocket covers, door trim
ornaments and gear knob covers.
EARNINGS SUMMARY (RMm)
FYE 31 Mar 2002 2003 2004 2005F
Turnover 86.6 115.7 105.3 115.4
PBT 18.5 27.9 31.3 37.4
Net Profit 15.4 22.2 23.4 27.7
Net EPS (sen) 5.1 7.4 7.8 9.2
EPS Growth (%) 49.1% 43.7% 5.5% 18.3%
PER (x) 20.6 14.3 13.6 11.5
DPS (sen) - - 1.6
Div Yld (%) - - - 1.5
Analyst
Helen Tan
E-*
helentan@ta.com.my
( 20721277 ext 1613
TA Securities Bhd (16029-V)
Menara TA One, 22 Jalan P Ramlee,
50250 Kuala Lumpur. Malaysia
Tel : 603 - 2072 1277. Fax : 603 - 2032 5048
[ 1 ] DK Leather Corporation Bhd

TA Securities Bhd
20 May 2004
Production Process
The production process is briefly summarised below:
Inspect Raw Materials
Process: Random check for
quality defects. If fail test,
reject whole batch
Product: Leather Seat
Covers
Process: trimming, sewing
Product: Pocket Covers
Process: Attach 3mm foam onto
fibreboard, staple with piece of
leather, then staple sewn leather
pocket
Die Cut or Drawing/Manual cut
q Re-check for defect; any defect is
marked and excluded from use
q Cut according to superimposed
template
Product: Steering Wheel Covers
Process: Fasten to steering wheel, glue
onto frame, then stitched. Blow dry wheel
Product: Door Trim
Ornament
Process:Glue foam on front
side of ornament, then glue
leather and polyfill on foam.
Wrap excess leather on back
Product: Gear Knob
Process: Glue die-cut
perforated leather onto
knob, trim excess leather
and clean off excess glue
Experienced Management
The group is led by Executive Chairman/Managing Director Koek Tiang Kung,
who has accumulated more than 10 years of experience in the leather related
industry. He is in turn assisted by a team of capable and experienced
management staff. Their experience and technical expertise enable DK Corp
to capitalise on market opportunities to help the group outpace its
competitors.
Major Customers and Market Share
The major customers for DK Corp for the 7-month period ended 31 October
are as detailed in Table 1. DK Corp caters to a wide variety of clientele-i.e.
automotive assemblers, car distributors and dealers and end-consumers.
The group indirectly sells to Proton and Perodua via Johnson Controls and
Auto Parts Manufacturing. To broaden its customer base and to reduce
dependence on any single customer, the group has expanded its sales to
other marques locally and internationally. Locally, the group has extended
its reach to other marques like Kia, Hyundai, Ford, Honda, Mitsubishi and
Volvo. For the 7-month period ended 31 Oct 2003, exports accounted for
45.6% of group turnover, an improvement over 36.9% share registered in
FYE 31 March 2003. The group is also setting up new subsidiaries to
strengthen its foothold in US, Australia and continental Europe. Management
believes that DK Corp is the largest manufacturer of automotive leather
upholstery in Malaysia (source: prospectus, page 78).
TABLE 1: MAJOR CUSTOMERS
Customer Length of Relationship % of
(Years) Group Turnover
Johnson Controls Automotive Seating (M) S/B 7 24.6
Auto Parts Manufacturing Co. S/B 4 7.3
Kah Motor Co. S/B (Singapore) 11 6.6
Cycle & Carriage Kia Pte Ltd (Singapore) 4 5.7
Lous Schweizer Leather (Asia) S/B 7 4.7
Abdul Latif Jameel Import & Distribution Co. Ltd (Saudi Arabia) 3 4.4
Mazda Motor (S) Pty Ltd (Singapore) 11 2.7
Regent Motors Ltd (Singapore) 11 2.5
Naza Automotive Manufacturing Sdn Bhd 1 1.9
Carinpa (M) S/B 7 1.2
Total -- 61.6
Source: prospectus
[ 2 ] DK Leather Corporation Bhd

TA Securities Bhd
20 May 2004
TURNOVER CONTRIBUTION FOR 7M ENDED 31/10/03
Saudi Arabia
4%
Australia
3%
Others
3%
US
16%
Singapore
20%
Source: prospectus
Malaysia
54%
Major suppliers
The principal raw material is leather, which the group obtains from Schweizer
Group (comprising ISA Industrial Ltd, Hong Kong and Lederfabrik Lous
Schweizer KG, Germany) and Conceria Pasubio SPA, Italy, either directly
or through their agent, Lous Schweizer Leather (Asia) Sdn Bhd. The group
also obtains insubstantial amount (i.e. less than 10% of purchases in any
given year) from other tanneries such as Howe Leather (Australia), Bridge of
Weir, Scotland and Elmo, Sweden. However, major suppliers are ISA Industrial
and Conceria Pasubio, which accounted for 16.0% and 66.7% of the group's
total purchases for the 7 months ended 31 October 2003. The group relies
on a small pool of suppliers to ensure consistent quality and supply of raw
materials, which subsequently would minimise disruptions to operations.
No Contractual Agreements
In line with industry norms, DK Corp does not enter into long-term contractual
agreements with its customers and/or suppliers. Despite this, the group has
secured the trust and commitment of its customers due to its established
track record in providing high quality products and services.
Forex risk
The group is subject to currency fluctuations as exports are denominated in
USD, Australian dollar (AUD), Euro and Singapore dollar (SGD), while raw
materials are imported in USD and SGD. For the 7 months ended 31 Oct
2003, some 45.6% of the group's products were exported in USD, AUD,
Euro and SGD while 83.9% of raw materials (namely leather hides) were
imported in USD and SGD.
Future Plans
The group is aggressively expanding overseas and has spread its wings to
Australia, Saudi Arabia and US in 2001 and to continental Europe in 2003.
Overseas sales are expected to exceed 45% of group turnover in 2004 and
to continue growing thereafter to over 50%. Other plans include diversifying
its local customer base, establishing its own brand name (i.e. DK-Schweizer)
and setting up its own distribution facilities overseas.
Actual results under-performed estimates
The group released its proforma income statement for FYE 31 March 2004
on 18 May 2004. Pretax and net profit were 6.4% and 5.7% below
management estimates in the prospectus (see table). The management
attributed this to lower-than-expected sales in the local market. Note that in
view of uncertain sales on the local front, our forecast pretax and net earnings
for FYE March 2005 are 14% and 11% lower respectively than management
forecast.
[ 3 ] DK Leather Corporation Bhd

TA Securities Bhd
20 May 2004
ACTUAL VS FORECAST RESULTS
Forecast* Actual
RM'000
RM'000
PBT 33,449 31,299
Tax (8,328) (7,877)
PAT 25,121 23,422
MI (276) -
Net Profit 24,845 23,422
*as contained in the prospectus
Healthy Financial Base
For the year ended 31 March 2004, interest coverage is healthy at 80.4x.
Based on the proforma balance sheet, the group will have net cash of RM15.0
million following the IPO exercise, while current ratio is strong at 2.4x. We
note that profit margin for the group has been consistently growing due to
the group's diversification strategy and overseas expansion. Pretax margin
has increased steadily from 12.1% in FYE 31 March 2000 to an estimated
29.7% in FY2004. This resulted in compounded growth of 52% for pretax
profit and 49% for net profit over the 5-year period.
Fairly valued below IPO price
Although we expect domestic sales to be marred by slower car sales in
anticipation of AFTA (where import duties will be reduced to 20% effective 1
January 2005), the group's diversification and overseas expansion should
anchor earnings going forward. Despite its solid financial base and overseas
expansion, however, we expect share price to be affected by the weak
sentiment pervading motor-related stocks, which are currently trading at
average PER of only 9.2x CY04, versus market PER of around 14x. We are
fairly valuing the company at a 30% premium to industry PER to account for
its diversified earnings base and lower dependence on domestic car players.
Our targeted PER is thus 12x on CY04 EPS of 8.9 sen. Despite the generous
premium, this results in a fair value of only RM1.06, which is 3.6% below the
IPO price of RM1.10.
The information in this report has been obtained from
sources believed to be reliable. Its accuracy or
completeness is not guaranteed and opinions are subject
to change without notice. This report is for information
only and not to be construed as a solicitation for
contracts. We accept no liability for any direct or indirect
loss arising from the use of this document. We, our
associates, directors, employees may have an interest
in the securities and/or companies mentioned herein.
for TA SECURITIES BHD,
Yaw Chun Soon, Executive Director - Operations
[ 4 ] DK Leather Corporation Bhd