DFZ ... Nov10

S & P Highlights

 DFZ reported 1HFY11 (Feb) net profit of 36.4 mln (+95.7% YoY) on revenue of MYR258.0 mln (+10.3% YoY). The sharp rise in net profit was mainly due to a gain of RM14.4 mln from the disposal of Radiant Ranch Sdn Bhd (RRSB) and contribution from the newly acquired Tenggara Senandung Sdn Bhd (TSSB).

 DFZ’s duty free operations in 1HFY11 rose 7.9% YoY to MYR232.7 mln, while segment margin was relatively flat at 16.3% (1HFY10: 16.7%). The property and hospitality segment saw revenue growing
41.1% YoY to MYR29.4 mln, on the back of recovering domestic economy. Furthermore, segment loss has reduced to MYR2.5 mln (1HFY10: -MYR5.4 mln).

 DFZ has decided to dispose three parcels of land used for oil palm plantation activities in Kedah for MYR8.6 mln, in order to streamline its assets with its core businesses. The disposal is expected to be
completed before the end of 1QFY12 and will result in a gain of MYR4.8 mln. We have not factored in the gain into our earnings forecasts, pending its completion.

 We expect FY11 net profit to grow by 44.2% to MYR72.9 mln, mainly contributed by TSSB and the gain from disposal of RRSB. We forecast FY12 net earnings to drop by 7.5% to MYR67.4 mln, in absence of
disposal gain. Nonetheless, core earnings (ex-disposal gain) were 15.2% higher YoY, driven mainly by expansion of its duty free businesses.

Recommendation & Investment Risks
 We resume coverage of DFZ with a Hold recommendation and a 12- month target price of MYR3.90.

 Our 12-month target price is based on a 10% discount to our estimated RNAV of Esmart Holdings Ltd (Esmart). Due to a corporate exercise proposed by DFZ’s major shareholder, Esmart will undertake a
mandatory take-over offer to acquire DFZ. We assume that the proposal will go through and shareholders will accept the offer for a better return (please refer to next page for more details). Meanwhile, current dividend yield of 4.7% should provide support to the stock.

 DFZ has submitted proposals to Malaysia Airports Holdings Bhd (MAHB MK, MYR6.05, 4-STARS) to acquire the Eraman duty-free retail shops (Eraman). The proposals are still at the preliminary discussion stage. The successful acquisition of Eraman should enable the group to capture a bigger market share of Malaysia’s duty free market, in our view. In addition, the acquisition will likely have synergistic effects that could result in higher operating margin for DFZ.

 Risks to our recommendation and target price include slower-thanexpected tourist arrivals to Malaysia, decreased spending in the retail market and failure or delay in completing its proposed deals.