3Q17 results were a sweet surprise with headline PAT rising 32.9% YoY from RM16.7m in 3Q16 to RM22.3m and dividend of SGD0.0125 as well as a proposed 2-for-5 bonus warrant issuance. Share prices have corrected to an attractive level of SGD0.39 from a recent high of SGD0.475, implying a more decent valuation of 16.3x FY18E PER (vs. sector average of 19.3x) and an attractive dividend yield of 4.2%.

3Q17 seeing the results of Heinemann’s partnership. Recall our earlier report dated 17 October 2016 highlighting Heinemann’s entry into DFIL (Heinemann is a global market leader operating at 78 airports in 28 countries with Euro6 billion in revenue). We notice improved gross margins of >300bps from 2Q17 (31.0%) to 3Q17 (34.2%) as DFIL benefits from better procurement and inventory management of Heinemann’s tie-up. However, the margin improvement would have recorded at a much lower level of 20bps in SGD terms, as MYR depreciated from 3.00-3.10 from 2Q16 to 3Q16. Nevertheless, the overall net earnings growth of 7% (excluding FX gains) still outpaced the MYR depreciation of 6% YoY. The improved working capital of DFIL with lower inventories and less trade financing required resulted in the growing cash pile from 2Q16 RM178m to RM227m as of 3Q16.

Results impacted by tourism slowdown in Thailand. The passing of King Bhumipol and the one-year mourning period for Thailand have seen a slowdown in tourism and affected DFIL’s border town Malaysia-Thailand duty free business. Nonetheless, tourism remains key revenue for Thailand’s economy and is expected to improve with the Thailand Tourism Ministry projecting 9.82% increase in visitors for 2017.

Airport sales continue to perform strongly. DFIL opened an additional outlet at KLIA2 in July 2016 bringing a total 14 outlets at KLIA and KLIA2. This bright segment would cushion the lower sales at the border town outlets which are impacted by the tourist slowdown in Thailand. In general, airport sales contribute about 20% of total sales vs. 30% generated by border town outlets.

Candy in store. A sweet surprise dividend of SDG0.0125 and 2-for-5 Bonus warrants is presented by DFIL with an exercise price of SDG0.43, which is 10.3% premium from closing price of SGD0.39. This would potentially raise SGD205.4m with full conversion of the warrants which will increase their acquisition war chest on top of their existing healthy cash position. Potential M&A activities or regional business expansion which are earnings accretive should negate the impact of the enlarged share base from the warrants conversion.

Downside risk of forex volatility. Revenue are generated in MYR but earnings are reported in SGD. The revenue and profit growth translated into SGD may be muted if MYR continues to weaken. At the current MYR-SGD level of RM3.13 (to SGD1.00), risk of further weakening of MYR is much lower and ringgit has also stabilised based on various economist views. For instance, based on Bloomberg consensus, average SGD/MYR is estimated at MYR3.08 for 2017 and MYR3.11 for 2018, indicating MYR should recover from current weakness at MYR3.13 and stabilize within MYR3.08 to MYR3.11. Furthermore, DFIL’s purchases are in USD (estimated to be in the region of 50%) and may see margins compressed as well. However, this should be mitigated by some natural hedge (tourist paying in foreign currency) and prudent FX hedging as evidenced by non-operational FX gains of RM9.6m in 3QFY17.

Dividend yield and defensive business. DFIL’s duty-free business is a defensive consumer play with an average dividend yield of 4.0% against the backdrop of low interest rate environment in Singapore. DFIL has a record of paying out at least 50% of its net profit as dividends (since 2012 to-date) despite not having a dividend policy in place.

Consensus is calling a Buy on the stock with a TP of SGD0.55, suggesting an upside of 39.2% from the current price of SGD0.395. At this level, it also implies decent dividend yields of 3.6% and 4.2% for FY17 and FY18, respectively.

Source: Kenanga Research - 26 Jan 2017