Duty Free International - CIMB Research 2017-07-13: 1QFY2/18 Downgrade To Hold On Longer Gestation

Duty Free International - CIMB Research 2017-07-13: 1QFY2/18: Downgrade To Hold On Longer Gestation DUTY FREE INTERNATIONALLIMITED 5SO.SI

Duty Free International - 1QFY2/18: Downgrade To Hold On Longer Gestation

  • A series of exogenous events (weak ringgit, southern Thai flooding, unexpected GST rollout) continued to plague Duty Free International (DFIL)’s 1Q18 bottom-line, which fell 18.1% yoy.
  • Slight earnings miss from lower-than-expected gross margins due to unfavourable FX.
  • Synergies from Heinemann partnership may need more time to materialise, which led to us cutting our FY18-20F EPS and dividend forecasts.
  • We downgrade from Add to Hold, with a 4-6% dividend yield as share price support in the near-term. 
  • We switch from a DCF to P/E valuation, resulting in a lower target price of S$0.33 (based on 18x CY18 PE, 0.5 s.d. above its 5-year historical mean).

1Q18’s slight miss on earnings due to weaker gross margins 

  • DFIL reported a 1Q18 revenue of RM167.5m (-13.1% yoy, +11.6% qoq), in line at 25% of our full-year forecast. We attribute the yoy sales decline to 
    1. softer consumer sentiment, and 
    2. 1Q17’s intensive promotions ahead of the Heinemann partnership, which boosted sales. 
  • 1Q18’s gross margin fell to 29.3% (1Q17: 28.9%, 4Q17:34.7%) on the back of rising US$/RM, which led to a core net profit of RM15.1m, below our expectations at 24% of FY18F as we project more MI dilution upon the exercise of Heinemann’s option.

Benefitting from increasing tourist arrivals in Malaysia via airports 

  • We interpret the 11.6% qoq sales growth in 1Q18, albeit with a slight sales slowdown in both liquor and beer categories especially at the borders, as a sign of easing consumer weakness at Malaysia-Thai border towns and subsiding effects of flooding in southern Thailand. 
  • Another key contributor lies in duty-free shopping at airports, which was unaffected by the recent 6% GST implementation (wef 1 Jan 2017), and recorded high single-digit sales growth in 1Q18, driven by increasing passenger volume.

Cash-generative and strong balance sheet for potential M&As 

  • One key positive from the Heinemann partnership for DFIL thus far has been better inventory and working capital management, which strengthened its 1Q18 operating cash flow to RM10.0m from RM7.7m in 1Q17, with its net cash/share steady at RM0.21 as of end-1Q18. 
  • The company also declared a lower interim DPS of 0.35 Scts (1Q17: 1.25 Scts), representing a c.90% payout of its 1Q18 earnings. 
  • We note that management is increasingly keen to better utilise its war chest for synergistic M&As.

Unlocking synergies with Heinemann in time to come 

  • We adjust our FY18-20F sales and margin assumptions, which resulted in 2.8-7.5% EPS cuts, as we believe DFIL may need a longer gestation period to reap its synergies with Heinemann. Accordingly, this lowers our FY18-20F dividend forecasts, still pegged to a historical record of at least 50% payout ratio. 
  • 2H18 is seasonally-stronger and we would look for opportunity to accumulate if share price weakness persists in the near-term.

Await more attractive entry point, downgrade from Add to Hold 

  • Our target price falls to S$0.33 (pegged to 18x CY18 P/E, 0.5 s.d. above its 5-year historical average) on lower earnings forecasts, as we now adopt a P/E valuation methodology (previously DCF) to better reflect its earnings profile. 
  • Key upside/downside risks to our Hold call stem from consumer sentiment and US$/RM fluctuations. 
  • The stock offers 4.6-5.9% FY18-20F dividend yields
  • Rerating catalysts include earnings-accretive M&As and stronger earnings delivery

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-07-13
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 0.33 Down 0.570