Duty Free International (DFIL SP) - UOB Kay Hian 2016-10-13: 2QFY17 Results Above Consensus; Net Profit Up By 45% yoy

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DUTY FREE INTERNATIONALLIMITED 5SO.SI

Duty Free International (DFIL SP) - 2QFY17 Results Above Consensus; Net Profit Up By 45% yoy

• DFI’s 2QFY17 core net profit jumped 45.3% yoy to RM13.8m from RM9.5m in 2QFY16, attributable to a marginal 4.7% rise in group revenue due to an overall increase in both sales of duty free goods and non-dutiable merchandise. 
• In spite of global uncertainties, DFI remains a resilient defensive consumer play with an attractive dividend yield. 
• Maintain BUY with a higher DCF-based target price of S$0.57.

RESULTS

2QFY17 net profit rose 45% yoy to RM13.8m. 

• 2Q is usually a seasonally weak quarter for Duty Free International (DFI). 1HFY17 net profit attributable to shareholders accounted for 42% of our full-year estimate. 
• Historically, first half net profit accounts for about 38-42% of full-year net profit. 
• The increase in net profit was mainly due to higher revenue from an increase in sales volume and improvement in pricing of certain merchandise. There was also a small forex gain of RM0.4m in 2QFY17 vs a forex loss of RM4.6m in 2Q16.

Margin on the rise. 

• Gross margin inched up 1.4% yoy as the group’s tie-up with Heinemann started to bear fruit in the form of inventory improvements. 
• Overall purchases declined for the period as the group pared down excess inventory. The group’s inventory value declined from RM297.2m as at 29 Feb 16 to RM217.2m as of 31 Aug 16.

Heinemann impact starting to flow through. 

• Net cash from operations in 2QFY17 increased by 526% yoy to RM35.8m vs RM6.8m for 2QFY16, mainly attributable to a RM22.2m decrease in inventory in 2Q17 thanks to its tie-up with Heinemann. 
• We expect this trend to continue throughout the rest of FY17 as DFI pares down old inventory and moves towards a lighter inventory model.

STOCK IMPACT

1HFY17 done and dusted; expect a stronger 2HFY17. 

• In our view, the group’s operational execution has been on track as demonstrated by the yoy improvement in gross margin, reversal into a strong net cash position and better inventory management.
• We expect a stronger showing in 2HFY17 as the second half of the financial year has typically accounted for about 58-62% of full-year net profit, with sales peaking in the fourth quarter (in line with the holiday season).

Modest about FY17 outlook; positioning for continued growth. 

• Given the uncertain macroeconomic conditions, the group expects a challenging environment going forward.
• By focusing on enhancing retail outlets through the improvement of product categories, supply chain cost effectiveness and logistics management, DFI will see a stronger gross margin and core business by FY18. We expect new products stemming from the Heinemann tie-up to hit the Malaysian market in FY18, given that DFI is focusing on rolling out wider product ranges at airport outlets.

Net cash balance improving slowly. 

• The group’s net cash balance improved from a net debt position of RM2.5m as of 29 Feb 16 to a net cash position of RM178.2m (11% of current market capitalization) as of 31 Aug 16.

Successful transfer from Catalist to the SGX. 

• DFI completed the transfer from Catalist to the mainboard of SGX on 5 Oct 16. Going forward, the group views this as an exercise to build a stronger investor base and to enhance the profile of the company so as to further tap capital markets to fund future growth opportunities.

EARNINGS REVISION/RISK

• We have tweaked out FY18 earnings forecast by 2.3%. This is due to a 0.5ppt increase in our gross margin assumption. We expect gross margin to improve from 32.5% in FY16 to 36.0% by FY18 (35.5% previously) as we factor in higher contributions from high-margin airport sales by FY18. We have kept our forecast for FY17 constant.
• 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 to Malaysia’s GST rate or other duties that could impact the price differential, and 
  5. M&As that may not be accretive.

VALUATION/RECOMMENDATION

• Maintain BUY with a higher DCF based target price of S$0.57 (WACC: 7.5%, Terminal growth: 1%). 
• We continue to view DFI as a defensive consumer play with a solid dividend yield. We have forecasted a dividend yield of 4.9-6.5% for FY17-19. 
• Our forecasts have no factored in any growth potential from M&As, which is a distinct possibility as the group’s cash balance continues to build up.

SHARE PRICE CATALYST

• Catalysts. Potential share price catalysts include: 
  1. accretive M&As, 
  2. better-than-expected FY17 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/ 2016-10-13

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.57 Up 0.560