Duty Free Intl

These are my findings and thoughts on Duty Free International (DFI).

DFI has a long operating history of more than 38 years. It has grown much over the years from humble beginnings to now the largest local duty-free retailing group in Malaysia, with strategic presence at all leading entry and exit points in Peninsular Malaysia, including airports, seaport, downtown, border towns and popular tourist destinations. DFI currently operates over 40 outlets comprising duty-free retail outlets and duty paid retail outlets located at various locations throughout Peninsular Malaysia.

In addition, DFI has acquired an interest in the hospitality sector owning an 18-hole Black Forest Golf & Country Club. Thus, it derives it's main revenue from operating it's retail business segment of duty free and duty paid retail outlets while adding on another hospitality business segment to their revenue streams. And all their businesses are marketed under the "Zon" brand.

There are a few pieces of interesting news and corporate developments that have happened to DFI in recent two years. DFI has raised capital through a series of share placements equivalent to a total net proceeds of $43.6 million. So far, it has not indicated clearly their plans to use the net proceeds raised from the share placements. However, their rationale is that the share placements have increased trading liquidity of their shares and helped to improve their capital structure. They also issued bonus warrants to their shareholders at 2 bonus warrants for every 5 ordinary shares held at an exercise price of S$0.43 per share. Also, DFI has moved from catalist board to mainboard in 2016.

The non-executive chairman mentioned in the latest FY annual report about the volatile Malaysian Ringgit against the US Dollar exchange rates, weak consumer sentiment on the back of a rising inflationary environment and natural disasters like the flood situation in Thailand will continue to present a challenging business environment. However, DFI is ready for a competitive year ahead. And they are also continuing to make efforts in enhancing operational efficiency, cost management, intensifying marketing strategies and managing business risks prudently, as well as do continuous upgrade and improvement of their retail outlets and product assortments to attract more customers.

With their current situation and corporate developments of DFI in the recent two years as a backdrop, we shall discuss how DFI has performed in the last 5 years. Please note that as their full year financial period ends in Feb every year, I am looking at a slightly backdated period from Feb 12 to Feb 17. I believe it will be better to include their most recent year's performance which ends in Feb 18. However, since their most recent full year's performance is not out yet, my discussion will be only up to Feb 17 as the latest available full year financial results.

First, we look at how their revenues have grown over the past 5 years (Feb 12 to Feb 17). Revenues have grown at a compounded annual growth rate (CAGR) of 2.36%.

Next, we look at the growth rate of their operating profits. Operating profits have grown at a CAGR of 1.62% over the past 5 years.

Next, we look at the growth of profits attributable to shareholders of the company. Profits attributable to shareholders of the company have grown at a CAGR of 1.68% over the past 5 years.

Next, we look at the growth in diluted earnings per share (EPS) over the past 5 years. Diluted EPS has grown at a CAGR of 0.74% over the past 5 years.

Next, we look at the operating margins 5 years ago in Feb 12 and then in Feb 17 (their latest financial year results). The operating margin 5 years ago was 16.3% and after 5 years was 15.7%. I checked up their operating margin trend over the past 5 years and they were mostly maintained around current levels plus minus 1 to 2 %.

Next, we look at their net profit attributable to shareholders of company margins over the same period of 5 years. 5 years ago it was 11.9%. After 5 years, it was 11.5%.

I reached a conclusion based on the above that DFI have grown in their profitability. However, their growth in profitability is very slow with revenues, operating profits, net profits attributable to shareholders of company and EPS all growing at low single digits CAGR over the past 5 years from Feb 12 to Feb 17.

Perhaps their recent round of issuing share placements have also diluted their growth in EPS and I foresee that the bonus warrants will further dilute the shareholdings of shareholders in future unless the group can put the capital raised through these means into good use to increase their profitability and returns for their shareholders. Thus, I will give them some benefit of doubt that they will deploy these capital raised in a good manner to garner good returns on the current capital raised apart from citing reasons such as to improve their capital structure. Cash sitting still doing nothing will erode in value over time. Thus, we need to know what are the future plans the group has in terms of utilising their cash capital raised to further grow their group.

We now look at how their balance sheet has changed over time.. I will tabulate the comparison of some important metrics between close to 6 years ago (Feb 12) versus latest financial report (Nov 17).

Current ratio = 1.11 (Feb 12) vs 5.06 (Nov 17)
Quick ratio = 0.28 (Feb 12) vs 2.7 (Nov 17)
Debt to equity ratio = 0.28 (Feb 12) vs 0.002 (Nov 17)
Shareholder equity CAGR over the period (Feb 12 to Nov 17) = 9.55%

I noticed there were accumulated losses registered under the equity attributable to shareholders in their FY11 and FY12 annual report. I checked up earlier financial years and noticed that there were accumulated losses too. However, from Feb 12 to Nov 17, the accumulated losses have declined and turned into positive retained earnings. This shows that DFI more than 5 years ago were not doing well as they accumulated losses on their balance sheet but have since turned around to better profitability especially from Feb 12 onwards until now resulting in growth in retained earnings on their balance sheet.

I also noticed that they are now a net net company with their current assets more than their total liabilities. Indeed with the rounds of share placements made in 2016 plus repayment and paring down on their short term and long term debts, their current ratio, quick ratio, debt to equity ratio have improved tremendously such that they are also now a net net company flushed with cash. The nagging question came to my mind again. What are they going to do with so much cash they are holding now? Are there any exciting pipeline expansion and growth for the future? Please do not end up holding so much cash without knowing what to do with it.

DFI have also grown their shareholder equity well at close to double digits CAGR over the past period from Feb 12 to Nov 17 making their shareholders wealthier at a good growth rate.

Now, we look at the various returns of this group. The returns on assets for DFI have fluctuated quite a fair bit over the period from Feb 12 to Feb 17, but have remained at 10% and above reaching almost 30% in one of the year. The returns on equity have also fluctuated quite a fair bit but have remained at above 13% and even reached 40 over % in one of the year. The returns on invested capital have also fluctuated by quite a fair bit but have remained above 12% reaching even as high as close to 40% in one of the year. These various returns trend show us that DFI generally generates good returns but it seems that the returns can fluctuate quite a lot probably depending on their business performance for any year.

Next, we look at how their cashflows have performed in their growth over the same period of 5 years from Feb 12 to Feb 17. Operating cashflows have grown by a CAGR of 30.6% over the 5 years period. Free cashflows have grown by a CAGR of 32.2% over the 5 years period.

I noticed that DFI operating cashflows and free cashflows have fluctuated quite significantly over the 5 years period even though they have grown at an impressive CAGR of over 30%. This could be due to the changes in working capital from receivables, prepayments, inventories and payables which can potentially affect the operating cashflows by a large margin in any single year. Thus, it would be good to monitor and take note of this area of changes in working capital as it could potentially affect their operating cashflows significantly in any year. This also could suggest that it maybe not easy to estimate the growth in operating cashflows and free cashflows due to these inherent working capital changes which are difficult to grasp how it will change in any single year.

But nevertheless, since the capital expenditures of DFI has remained relatively stable and at low level, the operating cashflows even though which fluctuate significantly in any year should still be able to produce free cashflows on a long term basis given their historical trend. Perhaps the long term investor should monitor whether the operating cashflows and free cashflows will see a general growing increasing trend over time or not even while they may fluctuate significantly in any year.

Lastly, valuation wise, assuming a CAGR of 0.74% on the diluted EPS for the next 7 years, based on my method of estimation, DFI has a fair share price of $0.21. Based on the current traded price of DFI which is $0.26, the market is according a CAGR of 2% on the diluted EPS.

I did not use a discounted cashflows (DCF) model to work out the estimate of DFI fair share price. This is because it's cashflows for the most recent full year results ended Feb 17 are exceptionally better due to significant increase in changes in working capital which maybe a one-off distraction and noise to really picture that DFI can indeed enjoy such high CAGR in their operating and free cashflows for the long term. When I am not too sure on the long term performance of a particular metric, it is best to just leave it alone and not make a forecast on it.

I believe whether to invest or not in DFI will depend on any visible expansion and growth plans of DFI communicated by management going forward. If they are going to utilise the cash hoard they now have in good ways to further their growth and returns for shareholders, then DFI is an investment candidate worth considering. If they do not really know what they are going to do with this cash hoard, then this may not be a good investment candidate. I still prefer a company with visible growth and expansion plans, displaying good visible profitability and growth and backed by a strong balance sheet producing high returns to their shareholders. DFI may seem to have some of these attributes, but it will be good to have all to make a really big convincing investment proposition candidate.quote : jeremyowtaip.

For such a company that has been constantly rewarding its shareholders with stable and sustainable dividend for the past 5 years. In my opinion ,It would be good way to treat it as a dividend yield/income play counter.

The average dividend works out to be 0.209 cents .

I would roughly estimate the fair value of about 35 to 38 cents.

The current price of 26 cents, could be viewed as undervalue and may provide further upwards potential of 34% to reach the TP of 35 cents.

Other may have different way of working out their fair value.. 
Not a call to buy or sell. dyodd.

Would leave it to the eyes of the beholders to decide and stick to their investment methodology.