If I could add my tuppence ha'penny opinion to the informative...

If I could add my tuppence ha'penny opinion to the informative and balanced commentary already posted here following the result:

DWS operates in a tough economic space: largely commoditised service offerings in a highly competitive environment.  

Against this context, I think the company's management have done a reasonably good job at preserving profitability over time (note: not growing earnings, but merely preserving them which, I think, as good as can be expected in the sort of cut-throat industry in which DWS operates).  

And, in plugging the various earnings holes that have appeared over time, I think management have been very good stewards of shareholder capital in showing discipline when it comes to allocating capital (read: acquisitions).


However, nowhere is the challenge for investing in DWS demonstrated more clearly than in the most recent result, which shows that - after three successive half-years of strong growth in operating profits, which followed a series of large acquisitions - EBIT for the June half (a period during which no acquisitions were making a debut full-period contribution) contracted by 9%.

DWS Half-on-half EBIT Growth:
JH2008:   -6%
DH2008:  -18%
JH2009:   -3%
DH2009: +28%  ($10m acquisition made in preceding 12 months)
JH2010:  +3%
DH2010:  -4%
JH2011:   -9%
DH2011:  +6%
JH2012:   +3%
DH2012:  -12%
JH2013:   -2%
DH2013: -19%
JH2014:  -23%
DH2014: -18%
JH2015:   -25%
DH2015:  +39%  ($10.0 m acquisitions in preceding 6 months)
JH2016:   +96% ($17.7 m acquisitions in preceding 6 months)
DH2016:  +18% ($7m acquisitions in preceding 6 months)
JH2017:   -9%

As can be seen, DWS's earnings tend to decay unless acquisitions are made to stem those inherent organic declines.

The result is that DSW's profits today are little changed on what they were a decade ago (Revenue is some 50% to 6% higher, but operating margins are commensurately lower... 19%-20% EBIT margin today vs 28%-30% in the late 2000's).

Which explains why DWS's share price is very much unchanged over the past 8 or 9 years, with relatively little share price volatility over time.


This issue - which someone touched on earlier - is that DWS is a very asset light business, so much so that it has almost zero tangible assets (negative, in fact, @ 30 June 2016 and 31 December 2016), with the implication that Return on Tangible Assets is almost infinite.

And when you have such high returns on tactile assets, compounded with relatively low barriers to entry, one of the consequences of such an industry landscape is intense competition for business.

As mentioned before, to its credit, management has navigated this structural headwind quite well, I think, with a series of well-timed acquisitions that have left ROE today at an acceptable-20% level, and - more importantly - have not required any recourse whatsoever to shareholders (Issued Capital is today exactly the same as it was in 2007 and the dividend payout ratio has been consistently maintained at around 80%, although in the past 2 years it has reduced somewhat, to 77% in FY2016 and 74% in FY2017, presumably a reflection of management wanting to build up some balance sheet firepower for the next acquisition).   

Ironically, what is inherently a cyclical business has ended up - largely thanks to management's astute "plugging" of earnings holes over time - behaving like a kind of fixed income security.


So, for what its worth, the way I view DWS as an investment prospect is that I think this is not a very good quality business, but it is quite prudently managed under the circumstances.  

In other words, its a 3 or 4 out of 10 business model that is being managed on a 7 or 8 out of 10 basis.

Overall, therefore, as an investment opportunity, that averages - crudely - to a 5 out of 10 proposition, in my mind's eye.

For 5 out of 10 investment opportunities, I would not like to pay:
-  a P/E of more than 11 or 12x,
-  an EV/EBITDA multiple above 6.0 or 6.5x, or
-  a Free Cash Flow yield (on EV) less than 10%.

By my reckoning, based on a flat financial result for FY2018 (which, absent any acquisitions, would be a favourable outcome, I believe), DWS is currently trading on the following multiples:
-  P/E = 11.5x
- EV/EBITDA = 7.8x
- FCF Yield (on EV) = ~8%  

As such, the scope for meaningful capital appreciation is limited, in my view.

And, given the potential share price downside if management is not able to execute more acquisitions successfully over the next 6 to 12 months, notwithstanding the seemingly attractive 6.5% dividend yield,  I don't see DWS being positioned in the right area of the reward-to-risk matrix.