Harrisons' RM92 million problem - what to do about it

Harrisons Holdings is a company which I do follow. It has businesses somewhat similar to DKSH. The reason I do not buy Harrisons is due to I already put myself into DKSH and I deem DKSH to be slightly of my preference than Harrisons. Someone pointed to me that Harrisons in fact has better margin than DKSH. Quite rightly commented. Harrisons Gross Profit (GP) margin is slightly above 10% while DKSH's GP is about 7%. That itself is a good benchmark to tell which company is able to sell the products it distributes at a higher price while having a better negotiation power over its suppliers.

However, one has to know where Harrisons strength is versus DKSH. Harrisons traditional strength is in East Malaysia. I would like to think that Harrisons has much better reach and channels in the East where reaching out, having strong contacts with its base is of much importance. If you notice, Harrisons customers include Nestle, F&N, Asia Pacific Brewery for FMCG products. Why such large multinationals where they probably already have strong distribution channels in Malaysia? Because of the channels that Harrisons has built over the years in East Malaysia. Harrisons has that strength. Obviously, with that bargaining power, margins can be higher.

Why do I pick DKSH over Harrisons

For strategic reasons, I feel that DKSH being a regional player with large operations in Asia would be looking to grow much more than Harrisons. If you notice, Harrisons Tradings's arm was bought over by a group of investors from the original Harrisons and Crosfield, one of the largest plantation company in Malaysia, once upon a time. Harrisons and Crosfield later became Golden Hope and of course all those are history with now Sime Darby being the larger group which holds Harrisons Plantations assets.

Now, with that - Harrisons with its large and strong distribution operations in East Malaysia is a company which will not be that aggressive anymore - that's what I think. And because of that DKSH is my preference.  Together with DKSH's bigger operations which is based in Malaysia, it is obvious that DKSH will be a larger operations as well as with more competition. I am an investor with less fear over competition if the company has a far larger advantage. That's what I felt on DKSH for its distributions operations in Malaysia.

Anyway, back to the title. Recently, Harrisons price has dropped some 17% from around RM3.50 to more recent RM2.92. But read below:

This is serious and worrying. What do I think about this? It is a company with huge and strong operations in Sabah. If (you know what) is not able to resolve issues with the Customs, operations of Harrisons can be affected. While, Harrisons obviously can absorb this large penalty, it obviously will try not to pay the RM92 million fine if possible. RM92 million for a company with RM200 million market capitalization is huge. This is not Apple or Sime Darby being slapped with a RM92 million fine.

We do not know whether Harrisons is in the wrong or perhaps the Customs had made the wrong judgement. But I would say lets wait this out - and if Harrisons is in the wrong, it may even change the scenario of its East Malaysia's operations which has been its strength all the while.