Duty Free International (DFIL SP) - UOB Kay Hian 2016-09-26: A New Chapter In The Making; BUY Initiation For 33% Upside

Duty Free International (DFIL SP) - UOB Kay Hian 2016-09-26: A New Chapter In The Making; BUY Initiation For 33% Upside DUTY FREE INTERNATIONALLIMITED 5SO.SI

Duty Free International (DFIL SP) - A New Chapter In The Making; BUY Initiation For 33% Upside

  • The group’s strategic tie-up with Heinemann is a potential game changer and positions DFI well to improve margins, increase product offerings, reduce cash conversion cycle and expand regionally. 
  • We project a conservative 3-year net profit CAGR of 15.0% but see upside from margin enhancements and possible M&A. 
  • Initiate coverage with a BUY and DCF-based target price of S$0.56.


Initiate coverage with a BUY and DCF-based target price of S$0.56. 

  • We see further upside to our target price as benefits from its strategic tie-up with Heinemann flows through. 
  • In addition, we see potential catalysts from rising dividends, earnings upside and accretive M&A given its strong financials (net cash of RM0.22/share).

Defensive oligopolistic business with high barriers to entry. 

  • The entry barriers include licensing (Custom Act 1967) or landbank within duty-free zone. In the case of the latter, DFI either owns the land (at the Malaysia/Thailand border) or has an exclusive lease arrangement (25 years at Johor Bahru).

Heinemann tie-up a game-changer. 

  • We see the strategic tie-up with Heinemann as a significant positive. Other than lowering procurement costs, we believe Heinemann could also help reduce its cash conversion cycle as well as broaden DFI’s product offering. 
  • In addition, with Heinemann’s strong global reputation, we think this will position DFI well for potential future JV or M&As. In terms of procurement savings, we estimate Heineman could enhance DFI’s gross margins by 3-5ppt, which could translate into 5-6ppt rise in net profit for every 1ppt rise in gross margin. 
  • However, we think the higher gross margins will gradually occur from FY18 as DFI runs down its higher-cost inventory.

Improved balance sheet through better inventory management. 

  • We see the potential for an improvement in DFI’s cash conversion cycle and inventory management. 
  • Prior to the tie- up with Heinemann, DFI had to hold higher inventory levels to secure bulk discounts. 
  • However, with Heinemann in the picture, we understand DFI could order lower quantities and yet be eligible for attractive pricing due to its Heinemann link. 
  • In our view, this could see its stock turnover reduce significantly and its net cash balance to gradually rise to RM268m by FY18 from RM47m as at May 16.

Potential overseas expansion through M&A. 

  • We see Heinemann’s presence as a precursor to potential overseas expansion through M&As or JVs. 
  • Other than international experience, Heinemann’s global procurement strength will position DFI well in venturing overseas, particularly in upcoming markets such as Vietnam, Cambodia and Myanmar. This could be funded by DFI’s rising cash balance going forward.


Solid earnings outlook with upside. 

  • We forecast a conservative 3-year net profit CAGR of 15%, underpinned by rising turnover as well as a gradual rise in gross margins from 32.5% in FY16 to 34.5% in FY17 and 35.5% in FY18. 
  • In addition, we have not built in any potential from M&A, which is a possibility as its cash balance builds up.


  • 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&A that may not be accretive.



  • In our view, potential share price catalysts include: 
    1. accretive M&A, 
    2. better- than-expected FY17 earnings as benefits from Heinemann flow through, and 
    3. rising dividends in line with higher earnings.

Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-09-26
UOB Kay Hian SGX Stock Analyst Report BUY Initiate BUY 0.56 Same 0.56