Duty Free International (DFIL SP) - UOB Kay Hian 2017-07-14: 1QFY18 Downgrade To HOLD As We Await More Clarity On The Impact Of GST

Duty Free International (DFIL SP) - UOB Kay Hian 2017-07-14: 1QFY18 Downgrade To HOLD As We Await More Clarity On The Impact Of GST DUTY FREE INTERNATIONALLIMITED 5SO.SI

Duty Free International (DFIL SP) - 1QFY18 Downgrade To HOLD As We Await More Clarity On The Impact Of GST

  • 1QFY18 headline net profit fell 16.7% yoy to RM16.5m due to a challenging retail environment coupled with the GST imposition. DFI has slashed its dividend payout but on the bright side, the benefits of the Heinemann partnership are still flowing in.
  • Balance sheet remains robust with minimal debt and a massive war chest.
  • Downgrade to HOLD with a new DCF-based target price of S$0.37 as dividends are less attractive now and the impact of the GST is uncertain. Entry price: S$0.30.



RESULTS


1QFY18 headline net profit fell 16.7% yoy. 

  • Duty Free International’s (DFI) 1QFY18 headline net profit came in at RM16.7m (1QFY17: RM18.6m), attributed to weaker sales from the Thailand-Malaysian border towns as well as the imposition of the Goods and Services Tax (GST) at border outlets and duty-free zones from 1 Jan 17. 1QFY18 core net profit was down about 10% yoy, in line with the 13% yoy.decrease in revenue.

Lower payout ratio the new norm? 

  • For 1QFY18, DFI declared a dividend of S$0.0035/share as opposed to S$0.0125/share for 1QFY17. Previously during FY14-17, DFI paid out a healthy dividend of 2.0-2.5 S cents. Even with the cut in dividends, DFI presents a forecasted dividend yield of 3.8-4.1% for FY18-19. 
  • We have lowered our payout ratio assumption from a previous 90% to 60% moving forward. The company is likely to continue paying dividends biannually in the first and third quarter of the financial year. 
  • We expect a full-year dividend of about 1.2 S cents for FY18.


STOCK IMPACT


Imposition of GST for border towns and duty-free zones. 

  • The implementation of GST at border outlets and duty-free zones with effect from 1 Jan 17 has had more impact than we previously anticipated. We did not expect much of an impact on sin products such as beer, tobacco and liquor but more on the perfume and cosmetics (P&C) as well as chocolate segment where the price differential between duty paid and duty free would be less apparent. 
  • Management has indicated that a drop in sales was evident in most sin product categories as well. However, management remains confident that it will take some time before sales start to normalise as consumers slowly adjust to the new pricing. 
  • In addition, by introducing new Heinemann SKUs into DFI’s catalogue, this might go some way to offset the drop in sales.

Heinemann benefits still flowing in. 

  • DFI’s inventory balance has further decreased from RM200m in 4Q17 to RM173.8m as of 1QFY18, in line with the group’s strategy to move towards a lighter balance sheet with Heinemann’s ability to acquire cheaper inventory without DFI having to purchase in bulk as before. 
  • For FY18-19, DFI should continue to see further improvements in the cash conversion cycle (CCC). We expect CCC to fall from 94 days in FY17 to around 44 days by FY19.


EARNINGS REVISION/RISK

  • We slash our FY17-19 net profit forecasts by 19-25% on the back of reduced sales forecasts as we factor in lower sales in the Malaysian-Thailand border towns together with lower sales from the GST implementation. We now expect it will take a longer time to see gross margin synergies from Heinemann.
  • Key risks include: In our view, key risks include: 
    1. regulatory risks, 
    2. geo-political risks or an outbreak of diseases that could hinder travel, 
    3. renewal risks at duty-free airport outlets, 
    4. changes in Malaysia’s GST or other duties that could impact the price differential, and 
    5. M&As that may not be accretive.


VALUATION/RECOMMENDATION

  • Downgrade to HOLD with a lower DCF-based target price of S$0.37 as dividends are less attractive now and we await further trend developments from the impact of the GST imposition on future sales. 
  • Our forecasts have not factored in any potential M&A opportunities. 
  • Entry price is S$0.30.


SHARE PRICE CATALYST

  • Catalysts. Potential share price catalysts include: 
    1. accretive M&As, and 
    2. better-than-expected FY18 earnings as benefits from Heinemann flow through.




Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-07-14
UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 0.37 Down 0.490



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