I am doing analysis on Dexion Limited, a leading Australian firm who manufactures and distribute a broad range of storage products in Australia and the Asia Pacific. Their core product range is pallet racking and shelving products designed for efficient space utilisation and logistics solutions, for both the industrial and commercial sectors. While they were listed on the ASX in April 2005, the firm have a 60-year history. Despite this, neither me nor my friends have heard of this firm before (until Martin give it to me), so I dare not comment on the firm’s brand being either well-known or not.
Their mission is to create value for their stakeholders by being the first choice provider of commercial workspaces, integrated systems and industrial storage solutions. Dexion’s dream or vision or management philosophy is “to be better than anyone else at what they do”. Their strategy is to defend and extend its position in established markets, to build and grow businesses in attractive markets and to create new growth platforms through driving innovation. They go by the tagline “Smarter Thinking”. Based on what I have read so far, I feel that this tagline suits their identity perfectly. They provide solutions to their customers on how to store things better, how to save space, how to structure the workplace etc. and all these require creativity and smart thinking. Not only that the tagline goes along well with their identity, it also provides motivation to their staff by constantly reminding them that the firm’s success greatly depends on the ability of the staff in creating solutions. I find this a stimulating approach to overseeing the business as it relates back to some concepts I studied in MGMT101 about revolutionary managers who regards employees as an asset to a firm – they are valued for their brains, passion and integrity instead of solely just keeping the wheels turning in the business.
Dexion has a wide range of suppliers as well as customers. Their suppliers have diverse skill and specialty, ranging from providing architectural solutions to manufacturing furniture to supplying raw steel. Their customers are diverse too, ranging from government agency to industrial warehouse to commercial office. Dexion operates in Australia, New Zealand, Dubai, Malaysia, China and Hong Kong. Taken as a whole, I think Dexion is truly walking its talk. Its “smarter thinking” is proven through its business diversification, geographical diversification and risk diversification. They demonstrate how committed they are in becoming “better than anyone else in what they do”. I think Dexion has become a one-stop shop and this makes it hard for competitors to match their service. Besides manufacture and distribution, Dexion also provides after-purchase service to its customers by giving lifetime warranty for its products (although by ‘lifetime’ it means 20 years only. Pretty misleading isn’t it? This could be one of its ‘smart thinking’ too). Last but not least, Dexion provides leasing services to its customers too, where products can be leased instead of purchased. I feel that this is a great strategy because lease contracts are more attractive to customers if the product’s cost is high.
I am amazed at how Dexion is very smart in grabbing the opportunities available to them to create strong competitive advantage. They reminded me of what I learnt in ACCY302 on how firms create competitive advantage i.e. by differentiating their product. By integrating financial service, good customer service and maintenance, they are creating differentiation advantage that makes their product more competitive in the market.
At first I was very delighted when I read the 2007 financial statements of my firm. I was amazed by their significant financial improvement as compared to the previous years. After reading it, I realised there is no single statement in the Annual Report that addresses how the share price is doing. This is absurd considering that Dexion is in fact a publicly listed company on the ASX. I managed to get the history of the stock price during year 2007 from Yahoo! Finance Database. Surprisingly, the share price of Dexion Limited is not doing well at all. Notwithstanding the continued growth in profit and dividends (sales revenue up by 34% to $251m, normalised net profit after tax up by 34% to $11.8m, earnings per share improved by 16%, strong operating cash flow of $11.5m, and dividend per share improved by 13%) the share price declined during the year from $2.40 on 2nd January 2007 to $1.81 on 31st December 2007. I am puzzled by this opposite trends. In fact, the share price has plummeted even more today (25th July 2008) it is down at $1.01 per share. I wonder if Dexion stock is "on sale" i.e. the price will soon go up, or is it actually "down the drain" i.e. a losing investment that will continue to decline.
I was motivated to calculate some financial analysis ratios to get to the bottom of what went wrong with the stock price. I was trying to see if there is something in the financial statement that is not favourable to the investors. As far as the figures are concern, nothing seems to be alarming to me. What about the financial ratios? Could the investors be seeing unfavourable ratios, like low current ratio, or low return on equity, or extremely high debt to equity ratio? Can those unfavourable ratios, if any, offset the favourable gross margin, profit growth etc? I am aware that there is a considerable subjectivity involved in the figures of financial statements that are used in calculating the ratios. There is no theory as to what should be the “right” number for the various ratios. Further, it is hard to reach to a conclusion when some of the ratios are favourable and some are unfavourable. I would be better off doing analysis on something else that can provide a more useful indicator so that I am more likely to come to a better conclusion, though not necessarily the right one.
When I felt the urge to calculate the ratios (which I learnt from ACCY111), I recalled about the “train story” which essentially tells us that the figures on the financial statements reflect the past, and not the future. They cannot help us in making projections about the future of the firm, hence it is simply a waste of time to look at those figures. I doubt Martin would want us to do that. Hence I thought I would better use my time looking into the qualitative aspects of the firm that might have caused the stock price to decline so badly.
In my opinion, from the purchase of Xiao Bao Ltd in Shanghai, the new manufacturing and sales facilities in Asia and the Middle East, Dexion is quickly becoming the global key player of the industry. It was reported in the annual report that the increase in revenue of $64m i.e. 34% from last year is mainly driven by the 5 main acquisitions made during 2007 (i.e. Hamilton Perry Industries, Elite Built, Precision, Godfrey & Darroch Consulting). It follows that the 34% increased in profit is also due to the acquisitions too. I feel a little bit disappointed, as I was hoping that the sales and profit improvement are caused by Dexion’s increased in business efficiency (from what I learn in ACCY302, profit growth is sustainable only if it comes from improved efficiency). But nonetheless, so long as the acquisitions give greater market share and hence higher revenue to the firm, it is sufficient for me to consider it as important and critical.
Dexion’s financial statement is kind of too good to be true. They reported about the new business ventures that they just signed themselves into, for example the new manufacturing facility opened in Malaysia, the new regional office opened in Dubai, the new acquisition of Shanghai Xiao Bao Storage Systems Equipment Co Ltd, Hamilton Perry Industries Ltd, Elite Built Pty Ltd, Precision (Audeo Ltd), Godfrey Office Equipment Pty Ltd and Darroch Consulting Ltd. Despite all these the firm is still able to maintain positive operating cash flow as well as increasing profit. If I were the auditor of Dexion, I would require tonnes of evidence before I finally find comfort in this. Given the information from the annual report, the only justification for this overwhelming revenue is the fact that the demand for the company’s product is great enough to offset the new acquisitions and the one-off expenditures related to it. If this is the case, how fast can Dexion generate revenue from the newly acquired facilities or firm? Is it possible that within less than a year all the cost of investment is successfully recouped? Is the payback period that short? This is too good to be true!
I am still puzzled about the fact that the stock price declines despite the company is doing financially well, at least that is what the financial statement says. I noticed that there is a link between the date when the stock price began to decline and the date when the previous Managing Director i.e. Mr Brenton Fuller resigned that is on the 16th of March 2007. The stock price was increasing to $3.10. The next day after Mr Fuller resigned, the stock price began to decline bit by bit and never rose up anymore. Has Mr Fuller’s resignation caused the shareholders to become prejudice with the firm? Could the shareholders be asking ‘Why resign now when the firm is doing very well?’ This situation reminded me of Enron where the CEO resigned one year before the giant corporate collapsed. Therefore, Dexion’s shareholders could have taken Mr Fuller’s resignation to be a warning sign that something is going wrong in the firm, thus causing them to panic and react by pulling out their funds from the company. If this is the case, then the decline in the stock price makes sense to me. As of now I cannot support the shareholder’s reaction, nor can I criticize because it is too soon to tell if there is indeed something wrong in the firm. Even though there is growth in revenue and profit, these figures could just be made up using creative accounting to mask the problems that the firm is possibly facing. In light of Enron’s collapse, putting myself in the shoes of the shareholders, I would probably do the same thing too.
I am concerned if the decline of the stock price would create a pressure for management to indulge in creative accounting. Some directors and all executives have some amount of options as a proportion of their remuneration. This creates an incentive for them to push the stock price higher. I do not wish to doubt their integrity, neither can I ignore the fact that history can repeat itself (Enron, Worldcom, HIH can happen again to anyone). In Dexion’s situation, there is pressure and opportunity for management to commit fraud. I am anxious to know what are the safeguards being put in place by the board of directors to prevent earnings management and fraud from happening.
I mentioned above how Dexion’s strategy resembles that of the “Entrepreneurial School”. I agree with Martin in his book TKWAV which shares his concern about this type of strategy. This strategy has a disadvantage i.e. when the visionary managing director becomes over-confident, he stops listening to other people and thus becomes more likely to make major mistakes. To me, Mr P Farmakis the Managing Director is a man of high determination. He took over Mr Brenton Fuller who resigned on 16th March 2007, which means he had only been with Dexion for nine months or so (the annual report was published in February 2008), but he was able to change the vision of the firm into what he thought was appropriate. This means that he took only nine months to understand Dexion’s business and industry. This tells me that he is a very enthusiastic, efficient, and maybe a little aggressive type of guy. There is a high tendency for him to grow over-confident, which can be disastrous for the firm.
I mentioned how Dexion’s financial statement did not report the declining stock price at all and there is no single line in the annual report to address the issue at all. I ask myself “what does this tell us about the financial statement?” This reminded me of what David Carter used to say in his ACCY308 on how annual reports are usually self-laudatory in nature – how only favourable information are included in the report whereas the unfavourable ones are omitted, portraying an incomplete picture to the Mum and Dad investors. So, in light of this, can I trust Dexion’s management? Even though they clearly said they meet or exceed the revised Principles and Recommendations set out in ASX’s Corporate Governance Council guidelines (ASX guidelines), can I trust that the management is giving a ‘true and fair’ view of the entity according to the IFRS Standards? Only time will tell I guess.
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