Duty Free International - CIMB Research 2017-01-13: Near term challenges at Thai border

Duty Free International - CIMB Research 2017-01-13: Near term challenges at Thai border DUTY FREE INTERNATIONALLIMITED 5SO.SI

Duty Free International - Near term challenges at Thai border

  • RM9.6m FX gain boosted 3Q17 bottomline; excluding that, 9M17 core net profit was below expectations.
  • Key miss stems from sales slowdown in Malaysia-Thai border towns, which could remain challenging in the near term.
  • Bright spots were in stronger airport channel sales and improving gross margins.
  • Duty Free International (DFIL) declared 2nd interim DPS of S$0.0125 and proposed 2-for-5 bonus warrants.
  • Reiterate Add; potential M&As and higher-than-expected dividends are potential rerating catalysts.

Not all smiles at neighbouring 

  • Thailand DFIL’s 3Q17 revenue fell 15% qoq and 13% yoy to RM133m (9M17: RM483m), at only 69% of our full-year numbers. Sales weakness at Malaysia-Thai border towns (c.30% of total sales) was attributed to the tourism slowdown in Thailand following the passing of King Bhumibol in Oct’16, but slightly offset by stronger airport channel sales (+10% qoq).
  • While overall tourism sentiment has improved slightly, we expect the border town situation to remain challenging, aggravated by the recent flooding in southern Thailand.

Heinemann partnership starting to bear fruit 

  • We are starting to see its Heinemann partnership paying off in the form of better gross margins from 2Q17’s 31.0% to 3Q17’s 34.2% (3Q16: 33.6%, 9M17: 31.0%), as DFIL benefits from better inventory management and more favourable sales mix. 
  • We see scope for further margin expansion, though the ringgit's depreciation against the US$ (50-60% of purchases made in US$) could weigh on margins in 4Q17.

FX gain boosted 9M17 net profit by 35% yoy 

  • DFIL recorded a substantial FX gain of RM9.6m in 3Q17 (9M17: RM11.4m), arising from S$- and US$-denominated deposit placements. Should the US$ remain elevated against the ringgit, we could expect such FX gains in the coming quarter till these placement proceeds of c.US$38m are fully utilised. 
  • Stripping out these non-operational gains, 9M17 core net profit grew 7% yoy and accounted for 60% of our full-year forecast.

Building up war chest; stock offers 6.4% FY17F dividend yield 

  • A 2nd interim DPS of S$0.0125 was declared, bringing its total DPS till date to S$0.025, ahead of our forecasted DPS of 1.68Scts for FY17, translating into 6.4% dividend yield.
  • DFIL also proposed a 2-for-5 bonus warrant issue (tradable with a strike price of S$0.43 per share and 5-year exercise period) which could raise gross proceeds of S$205m on full conversion, and are intended for the financing of its expansion.

Lower FY17F sales growth; Heinemann likely to raise stake by 15% 

  • We adjust our FY17-19F EPS lower by 16-25% to account for: 
    1. more subdued sales growth of 4% in FY17F vs. 15% previously, and 
    2. additional 15% equity subscription by Heinemann in DFZ Capital for €32.5m in FY18F. 
  • Together with proceeds from earlier 10% stake sale and placement, DFIL is now well-capitalised for potential M&A opportunities, which could catalyse the stock.

Maintain Add with lower TP of S$0.55 (7.5% WACC) 

  • We continue to like DFIL for its cash-generative business, 5-6% forecasted dividend yield for FY17-19F and strong balance sheet (net cash per share of RM0.19). We retain our Add rating on DFIL, with a lower DCF-based target price of S$0.55 (7.5% WACC).
  • Key risks to our call stem from forex volatility and adverse regulatory changes.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-01-13
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.55 Down 0.610