Duty Free International - CIMB Research 2017-04-27: Improving Margins, Shorter Cash Cycle

Duty Free International - CIMB Research 2017-04-27: Improving Margins, Shorter Cash Cycle DUTY FREE INTERNATIONALLIMITED 5SO.SI

Duty Free International - Improving Margins, Shorter Cash Cycle

  • FY2/17 core PATMI in line at 97% of our forecast, excluding one-off items from FX gain and fair value changes.
  • Stronger traction at airport channels could offset GST impact and weaker border town sales, to result in overall low single-digit topline growth in FY18F.
  • Higher TP of S$0.57 (DCF, 7.5% WACC) upon rollover; maintain Add. 
  • Expect near-term sales weakness, but DFIL remains attractive for its cash generative business, margin expansion and 4-6% FY18-20F dividend yield.

FY2/17 net profit grew 17% yoy on one-off gains 

  • DFIL’s FY17 net profit of RM73m (+17% yoy) came in 21% above our expectation, boosted by non-operational items of FX gain (RM9.9m) and gain arising from changes in the fair value of a call option previously issued to Heinemann (RM4.0m) for another 15% stake. 
  • Excluding those, FY17 core PATMI was RM59m, forming 97% of our full-year forecast. 
  • Synergies with Heinemann partnership have yet to show up in sales numbers, as FY17 topline only improved slightly by 4.6% yoy.

More duty-free shopping at the airports 

  • 4QFY17 revenue of RM170m was down 7.4% vs. a year ago, as flooding in southern Thailand and passing of Thai King Bhumibol in Oct 16 took a toll on tourism traffic at Malaysia-Thai border towns (c.30% of DFIL’s overall sales); however it grew 12.8% qoq on the back of stronger airport channel sales (yoy mid-teen growth on a full-year basis), thanks to 
    1. new outlets, and 
    2. better passenger volume. 
  • We believe duty-free shopping at airports will continue to be the main sales driver for DFIL.

Expect temporary negative GST impact on P&C sales 

  • We saw mixed sales performance across the different product segments in FY17: liquor (high single-digit growth), perfume (flattish), cosmetics (+20%) and cigarettes (slightly down). 
  • The unexpected implementation of 6% goods and services tax (GST) at border outlets and duty free zones effective from 1 Jan 2017 could affect perfume & cosmetics (P&C) more, as its sole tax benefits are withdrawn, thus leveling DFIL’s playing field with other retailers. Liquors and cigarettes tend to be less sensitive to tax changes.

Sustainable gross margins, cash-generative business 

  • While the partnership with Heinemann has yet to lead to stronger sales growth, we saw payoff in terms of better gross margins (4Q17: 34.7%, 3Q17: 34.1%, FY16: 32.9%) and inventory management (169 days of inventory in FY17 vs. 267 in FY16). 
  • We see little risk of the newly-imposed 6% GST squeezing gross margins, as management is likely to pass that on to consumers, while a more efficient supply chain could actually lift margins. FY17 operating cash flow surged from RM12m in FY16 to RM125m.

FY18-19 assumption changes 

  • We lower our FY18-19F revenue growth assumptions to account for a soft consumer sentiment at Malaysia-Thai border and possibly weaker P&C sales due to the additional GST. 
  • We also raise our forecast for FY18 gross margin, and factor in an enlarged share base from the 34.2m new placement. With that, our FY18-19 EPS estimates fall 5-9%.

Maintain Add with slightly higher TP of S$0.57 

  • As we roll over our valuation to end FY18F, our DCF-based TP rises to S$0.57 (7.5% WACC, 1% LTG). Maintain Add. 
  • The company is in a strong net cash position (at least RM138m in its warchest), and offers 4.6-6.0% dividend yield over FY18-20F. 
  • Potential catalysts are better-than-expected earnings growth and accretive M&As, while downside risks are poor consumer sentiment and EPS dilution from the exercise of warrants.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-04-27
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.57 Up 0.550