Duty Free International - Maybank Kim Eng 2016-09-28: A captive retail model

Duty Free International (DFIL SP) - Maybank Kim Eng 2016-09-28: A captive retail model DUTY FREE INTERNATIONALLIMITED 5SO.SI

Duty Free International (DFIL SP) - A captive retail model

  • Riding on the coattails of a retail spending recovery DFI is one of the largest duty-free trading groups in Malaysia. It is set to benefit from a recovery in domestic retail spending as well as rising tourism activities in the region. Currency could be a wild card in FY2/17.
  • Longer term, its strategic partnership with Heinemann would provide synergistic effects and more product range. 
  • DFI is in a good position to undertake more aggressive capital management initiatives but is now trading at 3.8SD above its 2-year mean PER (since 2014) of 17x.

Company Background 

Duty-free Expert 

  • Listed on the Catalist Board of Singapore Exchange Securities Trading Limited (SGX-ST), Duty-free International Limited (DFI), a 75.8%-owned subsidiary of Atlan Holdings (ALN MK, Not Rated), is one of the largest duty-free trading groups in Malaysia, with strategic presence at all leading entry and exit points in Peninsular Malaysia, including duty-free zones, airports, seaports, downtown, border towns and popular tourist destinations. 
  • Operating under the brand “The Zon”, DFI operates 44 outlets, comprising 41 duty-free retail outlets and three duty paid outlets, with a total gross built-up area (GBU) of 26,578 sqm.

Various duty-free channels 

  • Duty-free zone. In Peninsular Malaysia, DFI operates in two duty-free zones: Bukit Kayu Hitam, Kedah and The Zon Johor Bahru. The group owns two outlets in the Bukit Kayu Hitam duty-free zone (total GBU measuring 5,281 sqm), which are strategically located between the Malaysia and Thailand check points. In Johor Bahru, DFI owns 12 retail outlets in the duty-free zone (total GBU measuring 4,233 sqm), which are approximately 10 minutes away from Malaysia-Singapore Causeway. The group has an exclusive lease arrangement with Berjaya Assets (BJAB MK, Not Rated) for 25 years expiring in Mar 2038. It has the sole and exclusive right to import, wholesale and retail liquor, spirits, beers, chocolates, cigarettes, perfumeries and cosmetics within The Zon Johor Bahru.
  • International airports. DFI also operates duty-free shops in key international airports: Kuala Lumpur International Airport, KLIA 2, Melaka International Airport and Penang International Airport. The group also runs one duty paid outlet in Subang International Airport and two duty paid outlets in KLIA 2 (Gateway). In Malaysia, DFI is one of the two retailers that are allowed to sell wines, spirits and tobacco at international airports. The other player is Eraman Duty-free, a wholly owned subsidiary of Malaysia Airports (MAHB MK, HOLD) 
  • Duty-free border towns. DFI has a strong presence across all four existing Thailand-Malaysia border crossings: Bukit Kayu Hitam, Padang Besar, Pengkalan Hulu and Rantau Panjang. Duty-free border towns mainly cater to tourists and other travellers commuting between Malaysia and Thailand.
  • Other formats. DFI also operates duty-free outlets in duty-free islands such as Langkawi and Tioman. It is also the sole duty-free operator at Melaka Seaport since 1990. In the downtown, DFI has one outlet each in Penang and Sepang to cater for tour groups.


Proxy to recovery in retail spending 

  • DFI’s revenue is highly correlated to retail spending in Malaysia, which has started to show a recovery since end-2015. Several initiatives have been introduced by the government to boost private consumption following the implementation of GST in Apr 2015, such as higher cash handouts under BRIM, revision of minimum wage, as well as a 3ppts cut in employees’ EPF contribution. Effective Jul 2016, civil servants’ salary has also been revised up.
  • The rising middle class in SEA and Greater Asia promotes tourism in the region. The stronger purchasing power and a shift towards lifestyle products drive travel retail and bode well for DFI. Tourist arrivals to Malaysia grew 12% YoY in Jun 2016.

Strategic partnership with Heinemann 

  • In Mar 2016, DFI entered into a sale and purchase agreement to dispose 10% equity interest plus one share in DFZ Capital Bhd, a wholly-owned subsidiary of DFI which houses its duty-free businesses, to Heinemann Asia Pacific Pte. Ltd. (HAP) for EUR19.7m. Under the agreement, HAP was granted two options to acquire up to an additional 15% of DFZ’s shares for an aggregate cash consideration of up to EUR52.2m. The total consideration of EUR52.2m for a 25% stake pegs DFZ Capital to a trailing PER of 17.6x (FY15).
  • HAP is a wholly-owned subsidiary of Gebr. Heinemann SE & Co. KG. It is one of the leading multi-category duty-free retailers in KLIA2 retailing under the brand “Be Duty-free”. It is also the retail and distribution arm of Gebr. Heinemann’s business in the entire Asia Pacific region.
  • Gebr. Heinemann is a prominent global travel retail player operating about 115,000 sqm retail space. Gebr. Heinemann has exposure: 
    1. over 300 Heinemann duty-free and travel value and concepts shops at 78 international airports in 28 countries; 
    2. 23 shops on ten cruise liners and two ferries; and 
    3. more than 60 border shops under the retail brand “Travel Free”.
  • This strategic partnership will benefit DFI in the long term, via Heinemann’s global purchasing capability and its expertise in retail store management. Over the next 12-24 months, management expects some synergies from operational efficiencies and cost reduction in the entire supply chain. There should also be new brand products to be showcased across DFZ’s outlets, especially perfumes and cosmetics which are higher margin products.

Benefit from a less volatile MYR 

  • With revenue mostly denominated in MYR and approximately 52% of its purchases in foreign currencies, primarily USD and SGD, a strong MYR is beneficial to DFI. The group also has a balance of short term borrowings of MYR9.2m (18% of total) which are denominated in USD (at end-Feb 2016).
  • The average USD/MYR rate from Jun 2016 onwards is 4.04, which is ~2% below the USD1/MYR4.11 average for 2H15; this works in favour of DFI.
  • DFI incurred a net foreign exchange loss of MYR7m in FY2/16, of which MYR0.4m was the net unrealised foreign exchange loss. But with a more positive outlook on MYR, the currency factor could be a wild card in FY2/17. The group booked in a net foreign exchange gain of MYR1.4m in 1QFY2/17, of which the net unrealised gain was MYR2.3m.

3.0 Financials 

  • DFI derives its income mainly from trading of duty-free goods and nondutiable merchandise, which accounts for almost 100% of FY2/16 revenue.
  • It also owns the Black Forest Golf and Country Club (managed by a third party operator) as well as an oil palm plantation at Bukit Kayu Hitam.
  • Contributions from these segments are not material.
  • Being one of the market leaders of the domestic duty-free business, it is not surprising that DFI’s revenue grew at a CAGR of just 3.3% for FY2/14- 16 in this mature market. But its net profit attributable to shareholders (excluding discontinued operations) grew at a faster CAGR of 8.0% thanks to a shift to higher-margin product mix. Management’s expectation of greater synergistic effects on the entire supply chain and the introduction of more higher-margin products such as perfumes and cosmetics via the Heinemann’s strategic partnership would lead to further margin expansion.

Higher than FD investment 

  • In Other Receivables, there is MYR40.4m due from Berjaya Waterfront which is related to the sale of the group’s interests over leasehold properties in The Zon Johor Bahru. This transaction was completed in Mar 2013 but the settlement was deferred. After several extensions mutually agreed by the parties, Berjaya Waterfront is due to pay off the MYR40m balance on or before 15 Apr 2017. 
  • Management is not perturbed by the delay in settlement as the amount is guaranteed by Berjaya Waterfront’s holding company, Berjaya Assets (BJAB MK, Not Rated). Moreover, the interest rate charged is 9% p.a.. 
  • Operationally, DFI’s exposure is also mitigated by the fact that it had only prepaid ten years of advance rental to Berjaya Assets for the 25-year leases on The Zon Johor Bahru. In March 2013, DFI prepaid MYR88m in rental.

Dividend play 

  • As the duty-free business in Malaysia is mature, there is little need for huge capex going forward, unless there is massive development on the 772 acres at Bukit Kayu Hitam or M&A on the overseas front. At end May 2016, DFI is sitting on a net cash of ~MYR47m or 3.9 sen/sh (gross cash of MYR109m less borrowings of MYR62m). 
  • In FY2/16, management paid out 79% of its PATMI as dividend, offering a yield of 4.2%. 
  • In 1QFY2/17, DFI declared SGD0.0125/sh interim dividend for the current FY.

Latest results highlight 

  • 1QFY2/17 reported net profit jumped 36.5% YoY on the back of: 
    1. a 37.9% YoY rise in revenue mainly attributable to the new outlets at KLIA2 which commenced business in Aug 2015; 
    2. a 4.8ppts drop in effective tax rate to 21.1% (1QFY2/16: 25.9%) arising from higher non-taxable income relating to unrealised foreign exchange gain for the period; and 
    3. MYR1.4m net foreign exchange gain, of which the net unrealised gain was MYR2.3m. 
  • The confluence of these positive factors more than offset a 0.9ppts decline in PBT margin, from 14% to 13.1%, on more aggressive promotional activities. The strong 1QFY2/17 lifted BVPS to MYR0.39, NTA/share to MYR0.36.


  • DFI is trading at 23x FY2/16 PER, which is about 3.8SD above its 2-year mean PER (since 2014) of 17.0x (1SD is 1.6x). The trailing PER is also above the Bursa Malaysia Consumer Product Index’s CY16E PER of 13.8x but below Maybank KE Research’s average consumer stock coverage for Bursa Malaysia of 25x PER for 2015. 
  • Having said so, duty-free business is a unique segment where it serves mainly a captive market. The group has also obtained the approval in-principle to transfer its listing from the Catalist Board to the Mainboard of SGX-ST.
  • Given the PER range of the peer comp universe for 2016 and 2017, DFI could trade within a range of SGD0.34-0.47 based on consensus FY2/17 EPS of 6.8sen. However, do note that so far, only one broker covers the stock and the concentration risk to this earnings forecast may invariably be higher.


Tee Sze Chiah Maybank Kim Eng | Teh Kwong Yew Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-09-28
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