Duty Free International - CIMB Research 2016-10-12: Heinemann partnership in the works

Duty Free International - CIMB Research 2016-10-12: Heinemann partnership in the works DUTY FREE INTERNATIONALLIMITED 5SO.SI

Duty Free International - Heinemann partnership in the works

  • 1H17 core EPS in line at 45% of our full-year forecast; we expect stronger earnings in 2H17 from margin expansion and synergies with Heinemann.
  • Cash-generative business; reiterate Add with unchanged forecasts and TP.
  • Trading at 19.0x CY17 P/E with dividend yields of 3.8-5.0%.

New stores and promotions spur higher 1H17 revenue

  • DFIL reported 1HFY2/17 sales of RM350m (50%/ 49% of our/ consensus full-year forecast), up 20.7% yoy thanks to a strong 1Q17 when the company launched aggressive promotions to clear old inventory, paving the way for the Heinemann partnership.
  • 2Q17 sales growth of 4.7% was partly contributed by two new duty free retail openings at Kuala Lumpur International Airport 2 (KLIA 2), which resulted in higher rental of premises expenses of RM11.3m. KLIA outlet rents are typically pegged to a percentage of sales performance.

Expect better gross margins from 1H17’s 29.8% to FY17F’s 31.8%

  • 1Q17’s gross margin of 28.9% was not the norm as intensive promotional efforts to run down inventory weighed on product margins.
  • We saw a recovery to 31% in 2Q17 (1H17: 29.8%), which was above 2Q16’s 29.7% and 1H16’s 30.7%. We expect gradual margin improvements in the coming quarters as DFIL reaps the synergies from the Heinemann partnership in the form of: a) better sales mix, and b) enhanced procurement terms.
  • Stripping out FX fluctuations, 1H17’s core EPS increased marginally by 7.8% yoy to 2.8 sen, which we deem in line at 45% of our FY17 forecast (42% of consensus).

Cash generative and stronger balance sheet

  • DFIL recorded a strong operating cash flow of RM35.8m in 2Q17, vs. RM7.7m in 1Q17. Together with the RM139.3m proceeds from new share issuances and disposal of a 10% equity stake, the company pared down its short-term borrowings of RM30.7m in total. Its net cash/share as of end-Aug 16 climbed to RM0.15, substantially higher than the RM0.04/ share as at end-May 16.

Forex movements not in its favour

  • In 1HFY2/16, DFIL suffered a forex loss of RM4.5m arising from its US$- denominated payables as the RM weakened against the US$. However, we saw a reversal of the forex trend in 1H17, resulting in a RM1.9m gain.
  • Recall that the company makes 50-60% of its purchases in US$ and the remaining in ringgit. We anticipate there could be unfavorable forex movements from 3Q17 should the US$ continue to strengthen.

Maintain Add with unchanged TP of S$0.61 (DCF, 7.5% WACC)

  • We keep our FY17-19F projections and DCF-derived target price of S$0.61 (WACC: 7.5%) unchanged. The stock offers FY17-19F dividend yields of 3.8-5.0%. Higherthan-expected dividends and earnings could catalyse the stock. Maintain Add.
  • Apart from regulatory changes and forex volatility, EPS dilution from Heinemann’s additional stake subscription is a risk.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-10-12
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.61 Same 0.610