SINGAPORE (July 14): CIMB is downgrading its rating on Duty Free International (DFI) from “add” previously to a “hold” with a lower target price of 33 cents.
This is due to a series of external events, which include a weak ringgit, flooding in southern Thailand and an unexpected GST rollout.
In line with CIMB’s full-year forecast, DFI reported a 1Q18 revenue of RM167.5 million ($53.7 million).
In a Friday report, analyst Ngoh Yi Sin attributes the 13.1% y-o-y sales decline to softer consumer sentiment and intensive promotions ahead of the Heinemann partnership, which boosted sales.
“1Q18’s gross margin fell to 29.3% (1Q17: 28.9%, 4Q17:34.7%) on the back of rising US$/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,” says Ngoh.
However, the group’s sales increased 11.6% q-o-q in 1Q18 despite a slight decline in liquor and beer sales especially at the borders. The analyst sees this as a sign of easing consumer weakness at the Malaysia-Thai border towns and subsiding effects of the flood in southern Thailand.
Duty-free shopping in airports were fortunately unaffected by the recent 6% GST implementation and recorded high single-digit sales growth in 1Q18, driven by increasing tourist arrivals.
Meanwhile, the DFI-Heinemann partnership has shown better inventory and working capital management, which strengthened operating cash flow in 1Q18 from RM7.7 million to RM10 million, with a “steady” net cash per share at 21 sen as of end-1Q18, while also declaring a lower interim DPS of 0.35 cents from 1.25 cents in 1Q17, representing about 90% payout of its 1Q18 earnings.
Ngoh says, “We note that management is increasingly keen to better utilise its war chest for synergistic M&As.”
The analyst believes that DFI may need a longer gestation period to reap its synergies with Heinemann, resulting in 1.8-7.5% EPS cuts.
Rerating catalysts to the call include earnings-accretive mergers and acquisitions (M&As) and stronger earnings delivery, while risks include consumer sentiment and US$/RM fluctuations.
Shares in DFI are trading at 32 cents as of 11.37am.
