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1、55.0,%,5.9,5.7,5.5,5.3,5.1,Philippines,Initiating CoverageBuy,28 January 2013D&L Industries IncAdding color&spice to stock market,Share price:Target price:,PHP5.80PHP6.42,Leading supplier to household consumer brand manufacturers.Industrial holding firm D&L Industries Inc(DNL)generates about 81%ofit
2、s operating revenues and 43%of earnings from food ingredients,Kenneth NerecinaKenneth_Nerecinamaybank-(632)849 8839Mark RaceMark_Racemaybank-(632)849 8844Stock InformationDescription:DNL has four principal business lines,namely:(a)Food ingredients;(b)Colorants and plastics additives;(c)Oleochemicals
3、,resins and powder coatings;and(d)Aerosols.,subsidiary Oleo-fats Inc(OFI)a leading manufacturer of specialtyfood oils,fats and ingredients catering to corporate customers in thelocal food industry that includes restaurant chains and quick-servicerestaurants.While lower in revenue share at about 18%,
4、the highermargin plastics subsidiaries account for 30%of net income.Entrenching leadership position.DNL capitalizes on long-termrelationships with customers and its ability to produce customizedsolutions for their evolving needs.And with the expectation of sustainedgrowth in consumer spending,there
5、is likely to be robust demand forDNLs intermediate products that are an integral part of finishedconsumer products,especially since leading consumer companies are,Ticker:Shares Issued(m):Market Cap(PHPm):Market Cap(USDm):3-mth Avg Daily Value(USDm):PSEI:Free float(%):Major Shareholders:JADEL Holding
6、sKey IndicatorsROE(%)Net debt(PHPm):NTA/shr(PHP):Interest cover(x):,DNL PM/DNL.PS3,57120,714.3509.42.06,167.6433.417.0(2,970)2.3314.8,among DNLs major customers such as Universal Robina Corp(URC BUY)and Jollibee Foods Corp(JFC BUY).Strong management coupled with compelling track record.Founded in th
7、e 1960s by the low-profile Lao family,DNL has acompelling track record in both food ingredients and plastics(colorants,additives and engineered polymers).Members of senior managementhave an average of 40 years of industry experience.The younger Laoshold key management positions and have impressive f
8、inancial andtechnical backgrounds.Using sum-of-parts,target price is PHP6.42/sh.Taking into accountDNLs structure as a holding company,its ties to the consumer sectorand individual businesses,we estimate equity value using sum-of-partsapproach.We considered the consumer sector PER since we see DNLpo
9、tentially as a proxy for and an indirect play on consumer stocks.At,Historical Chart,DNL PM,our target price of PHP6.42/sh,DNL trades at a PER of 17.3x on 2013Fearnings of PHP1.33b(EPS:PHP0.37),slightly below DNLs profitguidance of PHP1.38b(EPS:PHP0.38).The average PER of theconsumer stocks we cover
10、 based on target prices is 23.5x.We initiatecoverage with a BUY rating.Listed on the local exchange on 12December,DNL stock has done quite well up 31.8%YTD.,4.94.74.54.311-Dec-12,26-Dec-12,10-Jan-13,25-Jan-13,D&L Industries Inc Summary earnings tableFYE 31 Dec(PHPm)2009A 2010AOperating Revenue 8,806
11、 9,755Revenue growth(%)n/a 10.8EBITDA(181)541,2011A12,67730.01,027,2012F12,482(1.5)1,291,2013F13,4107.41,659,Performance:52-week High/Low,PHP5.80/PHP4.32,Recurring Net Profit to CommonNet profit growth(%)EPS(PHP)DPS(PHP),226n/a0.090.02,701210.30.280.00,99742.20.400.00,1,14514.80.320.07,1,32816.00.37
12、0.08,1-mth,3-mth,6-mth,1-yr,YTD,PER,64.2,20.7,14.5,18.1,15.6,Absolute(%)Relative(%),31.8225.92,31.8225.92,31.8225.92,31.8225.92,31.8225.71,Div Yield(%)P/BV(x)ROE(%),0.413.742.8,0.07.546.9,0.05.041.2,1.22.822.5,1.42.517.0,ROA(%)Consensus Net Profit(PHPm),6.9n.a.,10.2n.a.,12.4n.a.,10.5n.a.,9.8n.a.,Sou
13、rce:Maybank ATR Kim Eng Securities,IncSEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS,9.3,9.4,9.5,13.9,6.0,9.7,D&L Industries IncValuationSum-of-parts approach.As a holding company with businesses infood ingredients,plastics,oleochemicals,resins and aerosol,we usedthe sum-of-part
14、s approach to value D&L Industries Inc(DNL).Withcapabilities in both commodity-type and specialty products and with itsthrust on customization in major businesses of food ingredients andplastics,there is no peer comparison that stands out,especially for thefood ingredients business of Oleo-fats Inc(
15、OFI).We looked atcomparable Asian companies in upstream and downstream operations.We did the same for First in Colours(FIC)and D&L Polymer&Colours(DLPC).In the DCF analysis used to value OFI and DLPC/FIC,weapplied WACCs of comparable companies(Figure 1).92%of value from food ingredients and plastics
16、.The resultingequity value is PHP22.9b or PHP6.42/sh,which we set as our targetprice.Food ingredients and plastics have a combined contribution of92%to NAV.The PER-derived values of the oleochemicals and aerosolbusinesses make up the balance(Figure 2).Figure 1.Peer comparisons,Oils and fatsLam Soon(
17、TH)PCLMewah International,Inc.,WACC,DescriptionProduces and distributes refined palm oil productsProduces vegetable oils.The company produces palm,lauric,coconut,AveragePlastics and colorantsClariant Chemicals(I)LtdClariant Pakistan LtdDainichiseika Color&ChemicalsManufacturing Co LtdThai Plastic an
18、d Chemicals PCLAverage,9.49.8,Manufactures synthetic organic dyestuffs,pigment dyestuffs,leather chemicals,synthetic resin binder materials,thickenersand other intermediates,Manufactures synthetic organic dyestuffs,pigment dyestuffs,leather chemicals,synthetic resin binder materials,thickenersand ot
19、her intermediates,Produces pigments and coloring agents for synthetic resins andfibers and printing inkManufactures polyvinyl chloride(PVC)in resin and compoundedpellet forms which are supplied to various industries includingplastic product manufacturing and construction industries.,PER(x)Oleochemic
20、als,28 January 2013,Southern Acids BhdAverageAerosolSeoul AerosolAverageSource:Bloomberg data,11.6811.687.547.54,Markets oleochemical products for commercial use,operates oilpalm plantations,hospitals and warehouses.Involved in the business of aerosol and other industrial gasesPage 2 of 32,D&L Indus
21、tries IncFigure 2.NAV estimate,Valuation,DNL,DNL share,(PHPm),stake(%),(PHPm),Basis,OFI(food ingredients)DLPC+FIC(plastics),16,0095,089,100%100%,16,0095,089,DCF 2012-15 FCFFDCF 2012-15 FCFF,PER at 11.7x on 2013 earnings(based on,COAT(oleochemicals,resins),3,764,34%,1,280,comparables),PER at 7.5x on
22、2013 earnings(based on,API(aerosol),440,100%,440,comparables),Net cash(debt)-parent,105,NAV,22,923,Implied PER for DNL based on 2013F earnings,17.3x,Source:Maybank ATR KimEng estimatesAn indirect proxy for consumer sector.Since DNL is mostly foodingredients by revenue,we inevitably look at it in rel
23、ation to the localconsumer sector,which has an average PER of about 23.5x on 2013Fearnings based on the target prices of the consumer stocks we cover.We dont think DNL should trade any higher than this PER.At our targetprice,DNLs PER would be 17.3x,which we think is acceptable,takinginto account too
24、 that DNL is a holding company.We like DNL given itsunique businesses especially food ingredients and plastics.We seeDNL as having added spice and color to a stock market that does nothave a broad array of options in the consumer sector.Figure 3.Average PER of consumer stocks(at target prices),Compa
25、nyJFCPFPIPRFMURCAverage,PER(x)32.011.925.422.525.923.5,Source:Bloomberg data,Maybank ATR KimEng estimatesEarnings outlookOFI expect higher margin.Following a 9%compounded decline involume sales for food ingredients from 2009 to 2011 and an estimated5%fall in 2012,we forecast 4%growth in volume this
26、year.At ablended price of almost PHP68,000 per MT,our projected revenue isPHP10.15b,up 7%.Total volume growth is relatively low,but higher-margin products(specialty ingredients and specialty fats)are projectedto grow 22%.They used to account for an average of 27%of volume,but we estimate their share
27、 to total volume was 34%in 2012 and 40%this year.Meanwhile,our stronger PHP outlook this year may alsocontinue to help improve margins,especially GPM,similar to whathappened in 2010 and 2011.We are looking at a 38%increase in netprofit to PHP623m this year from our 2012 estimate of PHP450m.,28 Janua
28、ry 2013,Page 3 of 32,D&L Industries IncFigure 4.OFI financial projections,2009(PHPm),2010(PHPm),2011(PHPm),2012F(PHPm),2013F(PHPm),SalesGPEBITDANPSales growthNP growthGPMEBITDAMNPM,7,22019(88)(170)-3%0.3%-1.2%-2.4%,7,4726454562193%-229%8.6%6.1%2.9%,10,26899676842737%95%9.7%7.5%4.2%,9,4611,048822450-
29、8%5%11.1%8.7%4.8%,10,1511,2481,0656237%38%12.3%10.5%6.1%,Source:Company data,Maybank ATR Kim Eng estimatesPlastics more DLPC income than FIC.The trend of higherproduction for DLPC,ultimately higher sales and earnings for DLPC,vsFIC is likely to continue.We assume more production will go throughDLPC
30、in order to take advantage of DLPCs status of being PEZA-registered.We forecast about 79%of plastic revenues to come fromDLPC and 21%from FIC.We are looking at combined earnings ofPHP442m in 2012 and PHP478m this year from PHP301m in 2011.Figure 5.DLPC financial projections,2009(PHPm),2010(PHPm),201
31、1(PHPm),2012F(PHPm),2013F(PHPm),SalesGPEBITDANPSales growthNP growthGPMEBITDAMNPM,68313011310219.0%16.5%14.9%,1,26721317215785.4%54.1%16.8%13.6%12.4%,1,54127223722221.7%41.1%17.6%15.4%14.4%,2,04844138937232.8%67.7%21.5%19.0%18.1%,2,28449243141211.5%10.8%21.5%18.9%18.0%,Source:Company data,Maybank AT
32、R Kim Eng estimatesFigure 6.FIC financial projections,2009(PHPm),2010(PHPm),2011(PHPm),2012F(PHPm),2013F(PHPm),SalesGPEBITDANPSales growthNP growthGPMEBITDAMNPM,1,0231581308315.5%12.7%8.2%,1,00114411271-2.1%-14.9%14.4%11.2%7.1%,71413111280-28.7%12.4%18.4%15.7%11.2%,641119197175-10.2%119.5%18.6%30.7%
33、27.3%,6181159166-3.6%-62.4%18.6%14.8%10.7%,Source:Company data,Maybank ATR Kim Eng estimatesNegative outlook for COAT.Publicly-listed Chemrez Technologies Inc(COAT)has been beset by tougher competition especially inoleochemicals since 2011 from both local and foreign producers(Malaysian and Indonesi
34、an oleochemical players).We are assumingthe competitive landscape is not changing significantly.The drop inoleochemical volume sales has been quite substantial since 2010(25%,28 January 2013,Page 4 of 32,D&L Industries Incin 2010 and a bigger 56%drop in 2011).Assuming lower volume in2012,we are esti
35、mating a 25%YoY drop in revenue to PHP3.8b and a7%dip in net profit.Thankfully,yield per kiloliter(kL)is above pre-2011prices.While we are projecting revenue and net profit to increase by10%and 11%,respectively,in 2013,these projections are still belowCOATs record numbers in 2010.Figure 7.COAT finan
36、cial projections,2009(PHPm),2010(PHPm),2011(PHPm),2012F(PHPm),2013F(PHPm),SalesGPEBITDANPSales growthNP growthGPMEBITDAMNPM,5,11571066147410%13.9%12.9%9.3%,5,83675971150914%7.4%13.0%12.2%8.7%,5,104546505311-13%-38.8%10.7%9.9%6.1%,3,81153447329125%6.7%14.0%12.4%7.6%,4,19158751432210%10.8%14.0%12.3%7.
37、7%,Source:Company data,Maybank ATR Kim Eng estimatesBringing up the rear.Aero-Pack Industries contribution is very muchlikely to remain small in the medium to long-term.We are forecasting a17%growth in revenue in 2012 to PHP333m,with earnings seen to riseby as much as 49%to PHP55m due to better marg
38、ins.This yearsgrowth is likely to be more modest in revenue and earnings.Over thelong-term,we see Aero-pack contributing about 5%to DNLs earnings.Figure 8.Aero-pack financial projections,2009(PHPm),2010(PHPm),2011(PHPm),2012F(PHPm),2013F(PHPm),SalesGPEBITDANPSales growthNP growthGPMEBITDAMNPM,162272
39、21416.7%13.8%8.6%,23945342447.9%70.4%18.9%14.2%9.9%,28562523719.2%57.3%21.8%18.2%13.0%,33387775516.8%49.2%26.1%23.0%16.6%,3579380587.1%5.2%26.1%22.5%16.3%,Source:Company data,Maybank ATR Kim Eng estimatesThe big picture food ingredients and plastics still the maindriver.From 81%of DNLs operating rev
40、enues in 2011,we forecastfood ingredients(OFI)to account for almost 76%of revenues last yearand this year.Colorants and plastic additives(FIC and DLPC)areprojected to account for 22%from 17%,respectively.Aerosols will likelyaccount for barely 3%of DNLs consolidated revenues.We estimate a2%drop in co
41、nsolidated operating revenues in 2012 to PHP12.5b but a7%increase this year PHP13.4b.Generally,improved margins resultingfrom the focus on higher-margin products are likely to push earningshigher in 2012(+15%to PHP1.1b)and this year(+16%to PHP1.32b).,28 January 2013,Page 5 of 32,D&L Industries IncFi
42、gure 9.Profit contributions of subsidiaries and affiliate,2012FOFIFICDLPC,5%,9%,39%,API,32%,COATOthers15%,2013FOFIFICDLPCAPI,4%,8%,5%,47%,COAT,31%,Others5%Source:Maybank ATR Kim Eng estimatesFigure 10.DNL financial projections,2009(PHPm),2010(PHPm),2011(PHPm),2012F(PHPm),2013F(PHPm),Operating revenu
43、eFood ingredientsColorants andplastic additivesAerosolsGPEBITDANPSales growthNP growthGPMEBITDAMNPM,8,8067,2111,43616053(181)2261%-2%3%,9,7557,4642,06222982354170111%210%8%6%7%,12,67710,2632,1412731,3301,02799730%42%10%8%8%,12,4829,4612,6893331,6951,2911,145-2%15%14%10%9%,13,41010,1512,9023571,9491,
44、6591,3287%16%15%12%10%,Source:Company data,Maybank ATR Kim Eng estimates,28 January 2013,Page 6 of 32,D&L Industries IncFigure 11.Interim results-DNL,(PHPm)RevenuesCost of sales and servicesGross profitExpenses,net,7M117,572(6,472)1,101(273),7M126,764(5,751)1,013(265),YoY-10.7%-11.1%-7.9%-3.1%,FY111
45、2,835(11,128)1,706(536),Equity share in net income,of associateProfit before income taxIncome taxNet profit,107935(191)743,56805(164)641,-47.7%-13.9%-14.5%-13.8%,1011,271(274)997,Source:Company dataRisksFundamentally linked to USD/PHP and commodity prices.Adversemovements in USD/PHP and commodity pr
46、ices will likely affect thebusiness of DNL,especially for OFI.OFI has seen volatile swings in itsmargins in the past 11 years.Bulk of the cost of goods sold is USD-denominated.Competition in all segments.All business segments foodingredients,plastics,oleochemicals and resins and aerosols are inhighl
47、y competitive environments.This may potentially put continuouspressure on margins.Dependence on few customers.Close to 40%of OFI revenues comefrom three customers.While dependence on few customers is risky,this is mitigated by the long relationships maintained by DNL over theyears.Indeed,OFI boasts
48、of its long history of relationships withvarious customers even in the absence of long-term contracts.Pressure on meeting expectations.Being the new stock in themarket and having performed quite well YTD,meeting the earningsguidance provided by the company is crucial.If earnings disappoint inthe nea
49、r-term,say 1Q13 is not in line with the 2013 profit guidance ofPHP1.38b,the stock is likely to be vulnerable to profit-taking.PER might be deemed high for medium-sized holding company.Since DNL is a holding company,we take into account Philippineholding companies,particularly in terms of PER.Holding
50、 companieslike Alliance Global Group Inc(AGI HOLD)trade at a PER of 14x,Metro Pacific Investments Corp(MPI HOLD)at 14x,DMCI HoldingsInc(DMC SELL)at 12x.However,earnings of these holdingcompanies are many times over that of DNL.DNL may then be viewedas rather pricey,in terms of PER relative to these
