We came back from Atlan Holdings Berhad (Atlan)’s analysts’ briefing with mixed feelings about its short-term prospects but are positive over the longer term. Key takeaways from the briefing includes : (i) better FY17 results but challenging for the next subsequent quarters, (ii) better operational efficiencies and potentially lower inventories, and (iii) potential earning enhancing acquisition with a solid cash position. We like Atlan for its (i) 73.67%-owned DFIL, which is endowed with strong cash flows and hence provide potential case for earnings enhancing acquisition and (ii) the undervaluation of its prime land in Jalan Ampang. Trading Buy with a SoPbased TP of RM5.60 (20% discount to holding company).

Better FY17 results but challenging over the next subsequent quarters. YoY, FY17 PATAMI rose 27% underpinned by higher revenue (+5% YoY). Specifically, its duty free business which accounted for 89.7% of earnings recorded higher revenue (+4.6%) due to higher sales volume and improvement in the pricing for certain products as well as revenue contributed from the new outlets at Kuala Lumpur International Airport 2 (KLIA 2). However, 4Q17 duty free revenue was lower largely due to the effects of slowdown in tourism traffic to-and-fro Thailand following the flood situation at Southern Thailand in 4Q17 as well as the after effects following the demise of King Bhumibol in October 2016 and imposition of Goods and Services Tax for the border outlets and duty free zones with effect from 1 January 2017 which could had led to lower consumption. As such, we expect the next two subsequent quarters’ performance to face similar challenges as we understand the situation there has yet to improve. However, we expect lower contribution at the Thai-Malaysian border to be mitigated by the growth in an increase in sales volume and improvement in the pricing for certain products as well as revenue contributed from the new outlets at KLIA 2, at least over the short to medium term. The automotive segment’s FY17 PBT fell 4% to RM5.7m and is expected to remain stable due to contribution from a key client. Going forward, the net effect from the recovery or appreciation in Ringgit against the US Dollar may see minimal impact to bottom-line. This is simply because, gains from purchasing in US dollars is expected to be offset by the marked-to-market US Dollar deposit placements at DFIL level.

Better operational efficiencies and potentially lower inventories. We believe Heinemann’s global bulk purchasing power, better inventory management, logistics and procurement could plug earnings leakage (or minority interest) from the divestment of DFZ. Instead of buying and holding inventories previously, now DFIL can purchase certain types of liquor directly from Heinemann, thus involving shorter holding period. As an indication since Heinemann officially came on board, operational efficiencies in terms of inventories level has dropped 33% YoY from RM297m to RM200m at DFIL as at 28 Feb 2017. We expect inventories conversion cycle to drop to two months (from 3-4 months earlier) and hence free up cash and lead to better working capital management. Ceteris paribus, lower inventories level is expected to help improve working capital and hence higher cash balance.

Trading Buy with TP of RM5.60. Factoring the bonus warrants into our Sum-Of-Parts (SOP) valuation and lowered Bloomberg consensus target price for Duty Free International (from SGD0.57 to SGD0.53), Atlan’s SoP-based TP is RM5.60/share (previously RM5.65), which has already factored in a 20% holding company discount.

Source: Kenanga Research - 3 Jul 2017