SINGAPORE (Sept 26): UOB Kay Hian is starting coverage of Duty Free International Ltd (DFI) with a “buy” and target price of 56 cents, citing numerous growth factors.

DFI is the largest travel retail operator in Malaysia with 44 outlets across Peninsular Malaysia at exit and entry points.

In a Monday report, lead analyst Nicholas Leow says DFI’s business has high entry barriers, from licensing to its land bank in the duty-free zone in Malaysia. The company either owns the land like at Bukit Kayu Hitam border or has an exclusive lease agreement --25 years at Johor Bahru.

DFI also has a land bank of more than 772 acres, which is valued at RM1.50psf (64.5 cents psf) on its books, below current market prices of over RM3.00 psf.

Leow says its recent tie-up with Heinemann could be a game-changer for DFI.

The tie-up would help reduce the cash conversion cycle, and broaden its product offerings. Procurement savings could be enhanced by 3% to 5%, translating to a 5% to 6% rise in net profit for each 1% rise in gross margin.

This higher gross margin is expected to occur from FY16 to FY18 according to Leow, as DFI runs down its higher-cost inventory.

“In addition, with Heinemann’s strong global reputation, we think this will position DFI well for potential joint ventures or mergers and acquisitions,” says Leow.

Better inventory management is also on the cards, which can lead to an improved balance sheet, Leow notes. DFI has had to hold higher inventory levels to secure bulk discounts, but with the tie-up with Heinemann, DFI could order lower quantities while enjoying attractive pricing.

“In our view, this could see its stock turnover reduce significantly and its net cash balance to gradually rise to RM307 by FY18 from RM47 as at May 2016,” says Leow.

There is also potential for overseas expansion, notes Leow, as the tie-up with Heinemann lends DFI its procurement strength. This positions the company well for overseas ventures, particularly in markets like Vietnam, Cambodia and Myanmar.

Malaysia’s 5% goods and services tax (GST) is also potentially set to rise, spelling more good news for DFI, highlights Leow.

“An increase in GST or duties will raise the price differential for goods sold by DFI and city prices, and enhance its business online,” says Leow.

At 10.37am, shares of DFI are up 2 cents at 44 cents.