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Design Capital (66% Profit in 6 months)

Updated: Sep 16, 2022

Design Capital Limited (‘Company’) is engaged in three business segments: It a) sources and supplies furniture to the US market via third-party e-commerce channels (70-80% of revenues); b) sources and retails furniture to the Singapore market via its own branded retail stores (12%-16%); and c) provides interior design services in Singapore.

Most of the segment profits are also generated by US furniture sales (67-92% of pre-tax profits in the last two years). The Singapore furniture segment results are comparatively marginal and the interior design service earnings fluctuate with the local property market.

The US segment performed well during the pandemic with increases in sales and profits as customers opted for e-commerce purchases of furniture. This performance was enough to offset the declines in the Singapore segments, which suffered from lockdowns. The US operation was affected, however, by increased tariffs that reduced gross margins.

The company reported ttm sales of $663m (2019: $662m) and net profits of $38m (2019: $35m). It generated ebitda margins of 10%-12% in the recent past, which is better than expected for a source-and-sell operation. Moreover, being an asset-light operation (see below), its return on tangible assets are excellent.

The financial position was strong with net cash of $262m – mostly arising out of a public offering in April 2019, which raised $105m at $0.30/share. The company intends to use the cash primarily to expand its US operations.

The net current asset value is $221m and net tangible assets (mostly including leased showroom and warehouse assets) were $299m. The company recently extended a major US lease after the balance sheet date (until 2032), which will increase lease liabilities by $5m.

The stock is selling for $218m, which is about equal to net current asset value and under 6x ttm earnings.

Dividends have ranged between $7m and $23m in the last five years implying a yield range of 3-10%.

Management is bracing for a worsening of US-China trade tensions, which may adversely impact operations. They intend to expand into the Canadian market and invest in marketing, promotion, and expansion of their product range in response to demand. They have also taken steps to obtain more control over US distribution (via above lease). Considering their track record of profitability, there’s no reason to expect an inability to perform.

The current price appears to provide a sufficient margin of safety for investors to commit to this stock.

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