Duty Free International (DFIL SP) - UOB Kay Hian 2017-04-28: 4QFY17 Persistent Slowdown In Thailand

Duty Free International (DFIL SP) - UOB Kay Hian 2017-04-28: 4QFY17 Persistent Slowdown In Thailand DUTY FREE INTERNATIONALLIMITED 5SO.SI

Duty Free International (DFIL SP) - 4QFY17 Persistent Slowdown In Thailand

  • Duty Free International’s (DFI) 4QFY17 headline net profit fell 14.9% yoy to RM17.8m (4QFY16: RM20.9m). 
  • The group has built up a significant war chest of RM265m through a series of share placements in preparation of M&A activities. However, the Thailand-Malaysian border towns continued to see weak sales due to the demise of King Bhumibol and flooding in southern Thailand. 
  • Maintain BUY but with a lower DCF-based target price of S$0.49.


4QFY17 headline net profit fell 14.9% yoy. 

  • Duty Free International’s (DFI) 4QFY17 headline net profit came in at RM17.8m (4QFY16: RM20.9m) due to weaker sales in the Thailand-Malaysian border towns as well as the imposition of the Goods and Services Tax (GST) at border outlets and duty free zones from 1 Jan 17. 
  • FY17 core net profit fell 4.8% yoy.

Flooding and weaker consumer spending in 4QFY17. 

  • DFI continued to feel the impact of King Bhumibol’s passing in Oct 16 with 4QFY17 sales falling 7.4% yoy. We had expected the situation to normalise going into 4Q17 as the one-month ban on celebratory behaviour would have ended in Nov 16. However, we believe the impact could persist into FY18 and possibly only normalise 1H18. 
  • The flooding in southern Thailand which affected more than 1m residents and damaged more than 200 roads and 50 bridges also impacted DFI’s 4QFY17 performance as it disrupted some transport routes to DFI’s border towns.


Airport channel remains a bright spot. 

  • According to Tourism Malaysia, Malaysia’s tourism industry appears to be showing signs of a recovery in 2016. Tourist arrivals came in at 26.8m in 2016, up 4% yoy (2015: 25.7m). This was likely due to improved flight accessibility and a weakening of the Malaysian ringgit.
  • The airport channel, which we estimate to account for 20% of DFI’s sales, saw double-digit revenue growth in FY17. We are optimistic on this channel going into FY18 Malaysia targets more than 30m tourist arrivals for 2017.

Imposition of GST at border towns and duty free zones. 

  • The implementation of GST at border outlets and duty free zones from 1 Jan 17 came in as a surprise to DFI as previously, border towns and duty free zones were not subject to such taxes. This is likely to impact mainly DFI’s cosmetics sales as the price differential between duty paid and duty free cosmetics is a lot smaller. 
  • Management indicated it is having discussions with cosmetics suppliers for better pricing given the new development. We expect the implementation of GST to have less of an impact on alcohol and tobacco sales as excise taxes on these products are very significant, possibly at 40-50% for tobacco and 10-20% for alcohol. We estimate perfumes and cosmetics account for less than 10% of DFI’s total sales while alcohol and tobacco-related products account for close to 85%.
  • Management indicated that the GST will be passed on to consumers and could result in customers taking sometime to adjust to the new pricing. The airport channel is not covered under this new implementation.

Net cash balance and cash conversion cycle improved significantly. 

  • The group’s net cash balance improved significantly yoy from net debt of RM2.5m as at end-FY16 to net cash of RM265.1m as of end-FY17. The cash conversion cycle also improved from 118 days in FY16 to 94 days in FY17, mainly driven by all-round improvements in working capital as the benefits of the Heinemann tie-up slowly stream in. 
  • Heinemann also has an option to subscribe for an additional 10% in DFZ Capital Bhd, a subsidiary of DFI. This would further bolster DFI’s balance sheet.


  • We lower our FY18-19 net profit forecasts by 6.9-9.8% on the back of reduced sales forecasts as we factor in lower sales in the Malaysian-Thailand border towns together with lower sales from the GST implementation.
  • 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.


  • Maintain BUY with a lower DCF based target price of S$0.49 (WACC: 7.5%, Terminal growth: 1%). 
  • Our forecasts have not factored in any potential M&A which is a distinct possibility as the group’s cash balance continues to build up together with the recent announcement of a bonus warrant issue.


  • Catalysts. Potential share price catalysts include: 
    1. accretive M&A, 
    2. better-than-expected FY18 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/ 2017-04-28
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.49 Down 0.550