Duty Free International Limited: A 9.89% Dividend Yield But Is That All You Should Be Looking At?
 
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Duty Free International Limited: A 9.89% Dividend Yield But Is That All You Should Be Looking At?

Tracy Lim
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At a share price of SGD$0.182 (correct as of the time of writing), the dividend yield of Duty Free International Limited (SGX: 5SO) is 9.89%.

If you already own this stock, should you just happily pocket the dividends…?

Dollar dollar bills
Source: giphy

Or is there more to it than meets the eye? Hmm…

I’m always sceptical whenever a company has an unusually high dividend. Curious, I decided to look into the fundamentals of Duty Free International Limited to see if there’re any other factors I should be looking at.

First, let us look at what the company does.

Brief Background Of Duty Free International Limited

DFI duty free
Source: Duty Free International

If you’ve ever bought stuff like alcohol, snacks or cosmetics from the airport on your way back from a holiday, I’m sure you probably know what the term ‘duty-free’ is all about. It’s basically where you can get the earlier mentioned items at a much cheaper price because they’re exempted from local taxes and duties.

Duty Free International Limited (DFI) and its subsidiaries is one of the largest duty-free trading groups in Malaysia.

Their core businesses encompass the trading of duty-free merchandise under a premium travel retail brand, “The Zon”, and they can be found all over Peninsular Malaysia

DFI hospitality
Source: Duty Free International

On top of that, DFI has a hospitality segment.

They own the Black Forest Golf and Country Club and an oil palm plantation, but their duty-free segment still accounts for the bulk (90%) of their revenue in FY2019.

Some Thoughts About Duty Free International Limited…

Even though DFI has a high dividend yield, a closer look at this company’s financials reveals that it doesn’t seem to be doing well financially.

Before I get into my analysis, take note that the financials are in RM as DFI is based in Malaysia. However, the shares of Duty Free International Limited are listed on SGX. Therefore the share price is in SGD$. The information below is based on their annual report for the financial year, which ended 28 February 2019.

The Good

Other than the high dividend yield. Here are some of the metrics which should be looked at.

Cash Ratio1.719
Current Ratio3.360
Dividend yield9.89%
Free Cash Flow-13.49m

Liquidity Ratios

Cash ratio and current ratio are both greater than 1. This means that they can sufficiently cover their short term obligations with their liquid assets.

Cash

There is a high level of cash in their balance sheet. However, this should be compared against their free cash flow, which actually decreased.

The Not-So-Good

Share Price

To put it simply, DFI’s share price has been going down… In fact, it has dropped, stagnated, and haven’t really shown any signs of recovery.

DFI share price
Source: Yahoo Finance

As you can see from the chart, their current share price is SGD$0.182 (5 July 2019). In the span of a year, their stock has taken a nosedive with its share price decreasing by almost half.

I did a little bit of research and found out that a potential reason for this dip in share price could be a court case which DFI was involved in with the Inland Revenue Board of Malaysia (IRB), over an alleged non-compliance of RM41.595 million tax payment. The company lost at the High Court and they have filed an appeal with the Court of Appeal in March 2019, but the final decision with regard to the outcome has not been decided.

On top of this poor performance share price wise, there is alsolow volume of trading of DFI stocks in the market. This lack of liquidity makes this DFI’s stock harder to buy and sell.

Share Buy-Backs

They’ve had many share buy-backs. Here’s a look at how many buy-backs have taken place over the past few months:

Duty Free International share buy bak
Source: SGX

In case you’re wondering, a share buy-back is a way for the company to acquire a larger market share. By doing this, the amount of shares available in the market becomes lower. Usually, the share price will increase after a share buy-back since there is a lower supply available.

These share buy-backs may be attempts to raise stock prices.

However, in those instances, their share price maintained for a while, before declining further.

Dividend Payout Ratio 

Looking at the company’s high Dividend Payout Ratio, it suggests that it might be a classic case of unsustainable high dividends. And this is because the dividends paid are higher than their net profit – at close to 124%. This is a very worrying concern if a company is paying more than they can earn.

Duty Free IntlFY2019FY2018FY2017FY2016
Dividends paid (RM,000)65,13779,77743,22849,294
Net profit (RM)52,57548,22076,96661,659
Payout ratio123.89%165.44%56.17%79.95%

You can also check out a similar case study: Starhub’s unsustainable 138% dividend payout ratio

Dividend Growth Over The Years

Duty Free IntlFY2019FY2018FY2017FY2016
Dollar dividend (RM)$0.0180$0.0185$0.0250$0.0160
% change-2.70%-26.00%56.25%
Dividend yield9.89%10.16%13.74%8.79%

Looking at the table, you’ll notice that Dividend Growth is negative. The actual dividend yield for previous years were probably lower than the above stated because at those points in time, share prices were higher.

Declining Revenue Over The Years (Although Overall Profit Increased Slightly)

DFI revenue and profit

The revenue decreased by 9.04% but net profit increased by 9.13%. This means that their expenses in FY2019 are lower than in FY2018.

From their income statement, the difference between costs in 2018 and 2019 is largely attributed to their changes in inventory and unrealised forex gains. But the focus here is the declining revenue, because a low top-line will not give a good foundation for their bottom-line. I mean, something is wrong if they have to depend on foreign exchange gains for their revenue rather than their core business.

Industry

Let’s take a look at where Duty Free International has a presence in.

  • Malaysia – Duty Free Shopping
  • Singapore – Wholesaler and distributor
  • Thailand – Brand management and distributor
  • Vietnam – Brand management and distributor

Here, we focus on Malaysia’s duty-free shopping.

According to the Airports Council International (ACI) World, international passenger traffic grew by an estimated 6% in 2018 as compared to the previous year.

Fun Fact: Singapore is named one of the Top 20 busiest airports for 2018 based on total passenger traffic! But don’t get confused here, as Duty Free Singapore is under The Shilla Group.

Malaysia air passenger stats
Source: CEIC on Malaysia’s air passenger traffic

According to The Star Malaysia, Malaysia’s air passenger traffic is set to grow at a faster rate of 4.9% this year.

You can read BCG’s piece on Why Travel Retail Needs an Upgrade, but here are some of their key points regarding travel retail:

  • The emergence of low-cost carriers
  • Shifting demographics

Most importantly, these are factors that are affecting consumer spending.

You would think that as the number of air travellers increases, shopping at duty-free would increase too. But the truth is: spending per passenger has decreased. The nature of the industry is one that faces a declining demand and lower consumer spending.

Moving ahead, DFI says that they will be exploring opportunities with market players to expand its presence and duty-free operations in Singapore and the region. But overall that is hinging on whether the company will actually do this…


In Summary

Duty Free International Limited:

  • Has a high dividend yield… 9.89% 🤑
  • Has good liquidity ratios, but looking at how they are tapping into their free cash flows – that’s a bad sign
  • Share price decreased by almost half within a span of a year
  • Paid out dividends which were higher than their earnings
  • Is facing declining revenue, which seems to suggest that it is a declining industry…

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