Brokers' take

Duty Free International | BUY Target price: S$0.56 Sept 26 close: S$0.44 UOB Kay Hian, Sept 26

We see the strategic tie-up with Heinemann as a significant positive. Other than lower procurement costs, we believe that Heinemann could also help reduce Duty Free International's (DFI) cash conversion cycle as well as broaden its product offering. In addition, with Heinemann's strong global reputation, we think that this will position DFI well for potential joint ventures or mergers and acquisitions. In terms of procurement savings, we estimate that Heineman could enhance DFI's gross margin by three to five percentage points, which could translate into a five to six percentage-point rise in net profit for every one percentage point rise in gross margin. However, we think that the higher gross margin will gradually occur from FY16 to FY18 as DFI runs down its higher-cost inventory.

We see a potential improvement in DFI's cash conversion cycle and inventory management. Prior to the tie-up with Heinemann, DFI had to hold higher inventory levels to secure bulk discounts. However, with Heinemann in the picture, we understand that DFI could order lower quantities and yet be eligible for attractive pricing. In our view, this could see its stock turnover reduce significantly and its net cash balance to gradually rise to RM307 million (S$0.09/share or 20 per cent of current market cap) by FY18 from RM47 million as at May 16.