SINGAPORE (Jan 16): CIMB continues to rate Duty Free International (DFI), the duty free retailing group in Malaysia, at “add” with a lower target price of 55 cents from 61 cents previously.

In a Friday report, analysts Ngoh Yi Sin and William Tng say they continue to like the stock for its cash generative business and strong balance sheet.

However, given the tourism slowdown in Thailand due to the passing of King Bhumibol on Oct 2016 as well as the recent flooding in Southern Thailand, they also expect the border town situation to remain challenging.

The analysts nonetheless anticipate a 5-6% dividend yield for FY17-19F.

This comes after DFI’s second interim distribution per share (DPS) of 1.25 cents was declared for 3QFY17, which translates into 6.4% dividend yield and brings the total DPS till date to 2.5 cents.

(See also: Duty Free International posts 33% earnings growth in 3Q)

They also note that DFI’s recently proposed 2-for-5 bonus issue could raise gross proceeds of $205 million on full conversion, which will be intended for the financing of the group’s expansion.  

“We are starting to see its Heinemann partnership paying off in the form of better gross margins from 2Q17’s 31.0% to 3Q17’s 34.2% (3Q16: 33.6%, 9M17: 31.0%), as DFIL benefits from better inventory management and more favourable sales mix,” comment Ngoh and Tng on the group’s alliance with travel retail solutions company Heinermann Asia Pacific, a subsidiary of Gebr. Heinemann.

“We see scope for further margin expansion, though the ringgit's depreciation against the US$ (50-60% of purchases made in US$) could weigh on margins in 4Q17,” they add.

Together with proceeds from DFI’s earlier 10% stake disposal of its business to Heinemann, the analysts believe DFI is “now well-capitalised for potential merger and acquisition (M&A) opportunities, which could catalyse the stock”.

As at 12.20pm, shares of DFI are trading flat at 39 cents.