Duty Free International - CIMB Research 2016-09-29: Ready for take-off

Duty Free International - CIMB Research 2016-09-29: Ready for take-off DUTY FREE INTERNATIONALLIMITED 5SO.SI

Duty Free International - Ready for take-off

  • Duty-free retail specialist riding on tourism recovery in Malaysia.
  • Strategic partnership with Heinemann (leading duty-free retailer globally) could realise synergies in the form of better margins and transfer of operational know-how.
  • Heinemann could also lend its procurement strength and sourcing capabilities to improve DFI’s inventory management and balance sheet.
  • Initiate coverage with Add. DFI offers FY17-19F dividend yields of 3.8-5.1%.



The most extensive duty free operator in Malaysia.

  • Duty Free International (DFI) is a duty-free retail specialist in Malaysia with 41 duty-free and three duty-paid outlets located in airports, duty-free zones and at the Malaysia-Thai border. 
  • DFI's long operating history and ownership of strategic locations, together with government-controlled duty-free licences, not only raise the entry barriers for potential new entrants, but also ensure that it has first-mover advantage in Malaysia, in our view.


Tourism proxy.

  • We estimate Chinese tourists form about 10% of Malaysia total tourist arrivals. 1H16 Chinese tourists rose 32% yoy to 0.99m. Annualising this trend, we estimate Chinese tourists to reach 2.2m in 2H16 (+30% yoy), backed by favourable government initiatives such as relaxation of visa requirements and tour packages promotion by Tourism Malaysia, which targets 30.5m tourist arrivals and Rmb10bn of tourist receipts for 2016.


Sustainable double-digit earnings growth.

  • Given its new partnership with Heinemann, we expect DFI to tap the latter's resources and expertise in product assortment and costing, retail store management, distribution and logistics management. 
  • We believe this should not only translate to topline growth of 10-15% p.a. in FY17-19F, but also cost savings and gross margin expansion to 35.1% in FY19F (FY16: 32.9%). 
  • We expect net profit to increase at a sustainable 16.1% in FY16-19F.


Cash generative.

  • We estimate that DFI’s cash conversion cycle will significantly decline from 192 days in FY2/16 to 85 days by end-FY19F (it can now order smaller quantities but still earn attractive bulk discounts from Heinemann), resulting in stronger operating cashflow and balance sheet. This war chest of cash (net cash/share of RM0.17 by end-FY17F after recent share placements) would come in handy for possible overseas expansion plans and earnings-accretive M&A opportunities.


Initiate with Add and DCF-derived target price of S$0.61.

  • We like DFI’s rare quality of earnings growth,3.8-5.1% dividend yield with strong balance sheet, and margin expansion due to potential synergies with Heinemann. 
  • We initiate coverage with an Add and DCF-based TP (WACC: 7.5%). 
  • DFI is trading at 18.6x CY17 P/E (15.4x CY18 P/E) which we think is undemanding vs. its 17% 3-year forward EPS CAGR and at 18% discount to regional peers’ 22.7x CY17 P/E. 
  • Catalysts are higher dividends and earnings. Risks: adverse regulatory changes and FX movements.




NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-09-29
CIMB Research SGX Stock Analyst Report ADD Initiate ADD 0.61 Same 0.61



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