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Dohler Stock (DOHL3) – Investment Analysis

Common Stock: Dohler S.A. (DOHL3)

Current Market Price: R$14.50

Market Capitalization (Common + Preferred): R$ 898 million

*All values in this article are expressed in Brazilian Reis (BRL) unless otherwise noted.

**The bulk of this analysis is based on the company’s most recent audited financial report, which can be found by following this link.

Dohler Preferred (DOHL4) - Stock Chart
Dohler Preferred (DOHL4) – Stock Chart

Dohler Stock – Summary of the Company

Dohler is a manufacturing company that produces and sells cotton, fiber, and synthetic based home products. They offer over 12,000 unique products such as curtains, towels, and blankets. Dohler was founded in 1881 and is headquartered in Joinville, in the state of Santa Catarina Brazil. They currently have over 3,000 employees and export to over 40 countries.

Revenue and Cost Analysis

Dohler had sales of R$ 500 million in 2019, an increase from R$ 480 million in 2018 and R$ 460 million in 2017. In 2019, their COGS were R$379 million, representing a gross margin of 24%. Although top line sales have been growing, so has their COGS. Gross margins in 2018 and 2017 were 28%.

The company had net operating income of R$ 6.3 million, but due to a large deferred tax credit, they had an accounting net income of R$ 31.8 million.

Balance Sheet Analysis

Dohler has a sound balance sheet. Their liquidity position is strong and their liability levels are reasonable. They have a solid long term asset base of plant and equipment and short term inventory and accounts receivable appear to be well managed.

Dohler – Debt Analysis

Dohler has total debt outstanding valued at R$ 22.9 million as of year-end 2019. R$7.2 million of which is due in the current period. Total debt has decreased from R$ 27 million at year end 2018.

It is worth noting that a significant portion of Dohler’s long term debt is denominated in Euros, meaning they have exposure to a depreciating Brazilian Real.

Dohler - Debt Table
Dohler – Debt Table

Dohler Stock – Share Dynamics and Capital Structure

As of July 2020, the company had 54.5 million common shares outstanding and 21.1 million preferred shares outstanding. Fully diluted shares outstanding is around 75.6 million shares.

Dohler Stock – Dividends

Dohler will pay a dividend in November 2020. Preferred shares will receive a dividend of R$. 143 cents per share and common shareholders will receive a dividend of R$.13 cents per share. Total dividends paid will be R$ 8 million, representing a payout of 25% of the previous periods earnings.

Management – Skin in the game

The Dohler family owns around 30% of the outstanding shares.

Dohler - Cap Table
Dohler – Cap Table

Dohler Stock – 3 Metrics to Consider

Debt to Equity Ratio

Total Liabilities/Total Share Holder Equity

R$143.5 million/ R$ 594.5 million = .24

A debt to equity ratio of .24 indicates that Dohler uses some debt in its capital structure, but relies mostly on equity financing to fund itself.

Working Capital Ratio

Current Assets/Current Liabilities

R$ 338.8 million / R$54.6 million = 6.2

A working capital ratio of 6.2 indicates a sound liquidity position. Dohler should not have a problem meeting its near-term obligations.

Price to Book Ratio

Current Share Price/Book Value per Share.

R$ 14.50/ R$7.86 = 1.8

Based on common and preferred shares outstanding, Dohler stock has a book value per share of R$ 7.86. This implies a common stock price to book ratio of 1.8, meaning the company’s stock trades at a slight premium to the book value of the company.

Dohler - Products
Dohler – Products

Dohler Stock – Summary and Conclusions

Dohler appears to be a well-run company with a history of nearly 140 years. The Dohler family still owns a significant stake in the company. The company is in a solid financial position with a sound liquidity position and manageable liability levels.

My two major concerns are the company’s Euro denominated debt. If the BRL continues to depreciate this will be a drag on earnings. And second is textile industry in general. Textile manufacturing is a highly competitive business where the lowest cost producers win in the long run. While the company is competitive domestically, Brazilian companies are very rarely the lowest cost produces internationally, due to high tax burdens and highly restrictive labor laws.

Although I am impressed by Dohler’s history and management, I am not willing to invest in a Brazilian textile manufacture, at least not at Dohler’s current valuation. I will continue to monitor Dohler, and reconsider should their circumstances or valuation change.

Disclaimer

This is not investment advice. Nothing in this analysis should be construed as a recommendation to buy, sell, or otherwise take action related to the security discussed. If I own a position in the security discussed, I will clearly state it.

This is not intended to be a comprehensive analysis and you should not make an investment decision based solely on the information in this analysis. I hope this serves as a useful starting point for a more comprehensive analysis, and hopefully draws attention to aspects of the company that were overlooked or merit further investigation. This is by no means intended to be a complete analysis. Again, this is not investment advice, do your own research.

Patrick Flood, CFA

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