D&L INDUSTRIES

Still Growing Strong

Philippine Equities Research

6 November 2014

BUY
BPI Sec. Price Target: Php16
Price: Php14.80 (as of 11/06/2014)
Cons Price Target: Php13.87*

Perf

1MO

2MO

1YR

DNL

12%

23%

127%

PSEi

0%

-1%

11%

SUMMARY POINTS:
BUY on DNL: We reiterate our BUY recommendation on DNL as the
company has matched our 9M14 forecasted net income. Net income for
9M14 reached Php1.3B, growing 24.1% yoy and in-line with our forecast.
Sales for the period exceeded our expectations by a large margin (more
than 24%) and growing more than 38.3% yoy. Margins, however, were
lower than we had expected due to the larger than expected sales of low
margin commodity products. We will adjust our GPM expectations of DNL
after our meeting with company.

Investment Thesis: In our opinion, DNL is an undervalued Philippine

consumption play. We think that DNL is well-positioned to leverage off the
regional expansion of its client base given its R&D strength and longstanding corporate relationships. We view DNLs consolidation of COAT as
value-accretive to the company and we forecast that the company will have
a FCF yield of 5.2% in 2016F with a possible upside risk to its dividend yield.
On our numbers, DNLs ROCE should continue to improve to 19.7%% by
2016F, from 18.4% in FY13A.
Margin Shift: We have some concerns on our forecasted margins not
being reached, though we do not believe that management would sacrifice
margins without assuring a commensurately higher net income level in
return. Lower margin commodity products accounted for 41% of total
revenues for DNL in 9M14, higher than the 32% contribution in the whole
of 2013. We will update our forecasted figures and assumed margins after
our meeting with DNL on its shifting revenue mix.

*Source: Bloomberg
CODE: DNL PM
MKT CAP: Php48.9B/(US$1.1B)
T/O (1-WK AVE.): Php80.1M/(US$1.8M)
KEY FIGURES

FIGURE 1: POTENTIAL PRICE CHART

20

5
0
10/9/2013

FY13A

FY14F

FY15F

FY16F

1,012

1,399

1,788

2,410

2,814

0.49

0.39

0.50

0.67

0.79

29.1%

-20.6%

27.8%

34.8%

16.8%

0.50

0.61

P/E (x)

8.9

16.1

29.6

21.9

P/B (x)

1.0

1.5

3.7

3.3

2.9

17.5%

4.1%

1.4%

1.2%

1.6%

EPS (Php/Shr)

15
10

FY12A

Net Income (Adjusted)

EPS Change (yoy)
Consensus EPS (Php/Shr)

17
16
14
10/9/2014

*Source: Bloomberg, BPI Securities

THOMAS HUANG MBA

Fundamental Analyst

Bull Case
Base Case
Bear Case

Dividend Yield (%)

18.8

10/9/2015ROE (%)
Net Debt/Equity (%)

14.2%

15.8%

12.5%

15.0%

15.6%

-27.8%

-20.1%

19.9%

9.8%

0.5%

Interest Coverage (x)

19.8

37.4

23.7

23.8

27.6

EV/EBITDA (x)

10.6

12.4

23.5

15.9

13.5

Free Cash Flow Yield (%)

9.6%

0.8%

-6.8%

3.8%

4.6%

996

107

(3,616)

2,028

2,450

Free Cash Flow (Php, Millions)

*Source: BPI Securities, Company Information

See Appendices for Analyst Certification and important disclosures. BPI Securities may seek to do business with companies covered in its reports. As a result, investors must be
aware that the firm may have a conflict of interest that could affect the objectivity of its research. Investors should consider this report as only a single factor in making their
1
investment decision.

Philippine Equities Research

DNL

INCOME DATA (in Php Millions)

FY12A

FY13A

FY14F

FY15F

FY16F

Sales

6,375

10,766

12,849

18,969

20,432

Sales Change (YOY)

82.0%

68.9%

19.3%

47.6%

7.7%

Company Background: D&L is a

Gross Profit

1,196

2,001

2,510

3,652

4,181

business solutions company that

EBITDA

1,260

1,853

2,372

3,423

3,925

provides food ingredients, polymers,

Operating Expense

(34)

(359)

(361)

(573)

(615)

and aerosols to consumer-related

Operating Profit

1,163

1,642

2,149

3,079

3,567

businesses.

Other Income / (Expense)

D&L

supplies

its

corporate clients with inputs such

as frying oil, shortening mixes,
ingredient

substitutes,

and

condiments. Key customers of DNL

include URC (Buy, PT: Php174), JFC
(Underperform,

PT:

Php162),

Golden Arches (McDonalds, not

listed) and, Krispy Kreme (not
listed) among others.

DNL is an undervalued Philippine

consumption play. We think that
DNL is well-positioned to leverage
off the regional expansion of its
client base given its R&D strength
long-standing

relationships.

We

corporate
view

DNLs

125

27

(2)

(129)

(129)

1,288

1,669

2,147

2,950

3,437

Tax (Expense) / Benefit

(146)

(270)

(359)

(540)

(623)

Net Income (Adjusted)

1,012

1,399

1,788

2,410

2,814

Net Income Change (YOY)

51.3%

38.3%

27.8%

34.8%

16.8%

0.49

0.39

0.50

0.67

0.79

EPS Change (YOY)

29.1%

-20.6%

27.8%

34.8%

16.8%

Outstanding Shrs

1,750

2,050

3,571

3,571

3,571

FY12A

FY13A

FY14F

FY15F

FY16F

1,142

1,399

1,788

2,410

2,814

Depreciation & Amortization

98

211

223

344

358

Change in Working Capital

51

(1,322)

(402)

(625)

(623)

EPS

*Source: BPI Securities, Company Information

CASH FLOW DATA (in Php Millions)
Net Income

Investment Thesis: In our opinion,

and

Pretax Income

Cash Flow from Operations

Capital Expenditure
Cash Flow From Investing
Cost of Dividends Paid
Cash Flow from Financing
Free Cash Flow

908

264

1,538

2,258

2,679

(169)

(154)

(5,227)

(230)

(229)

(110)

(5,227)

(230)

(229)

(1,351)

(536)

(715)

(626)

(843)

3,563

(1,795)

2,581

(755)

(973)

996

107

(3,616)

2,028

2,450

Net Debt

(2,231)

(1,776)

2,844

1,571

94

consolidation of COAT as value-

Change in Net Debt

(2,382)

454

4,621

(1,273)

(1,477)

accretive to the company and we

*Source: BPI Securities, Company Information

forecast that the company will have

BALANCE SHEET DATA (in Php Millions)

FY12A

FY13A

FY14F

FY15F

FY16F

a FCF yield of 5.2% in 2016F with a

Cash & Equivalents

5,071

3,438

2,765

4,038

5,515

possible upside risk to its dividend

Trade Receivables

1,473

1,969

3,099

3,357

3,617

yield. On our numbers, DNLs ROCE

Other Current Assets

1,909

2,609

6,157

6,644

7,129

should continue to improve to

Property, Plant & Equipment

1,678

1,619

2,674

2,560

2,431

19.7%% by 2016F, from 18.4% in

Other Non-Current Assets

1,730

1,767

6,857

6,857

6,857

11,861

11,403

21,552

23,456

25,548

2,840

1,662

5,609

5,609

5,609

960

839

1,582

1,703

1,824

37

42

42

42

42

Total Liabilities

3,837

2,543

7,233

7,354

7,475

Total Equity

8,024

8,860

14,319

16,103

18,074

11,861

11,403

21,552

23,456

25,548

4.59

4.32

4.01

4.51

5.06

FY13A.

Total Assets
Short-Term Debt

FIGURE 2: P/E CHART (X)

40

Other Current Liabilities

Long-Term Debt
Other Non-Current Liabilities

20
0
12/27/2013

Total Equity & Liabilities

6/27/2014

*Source: Bloomberg
FIGURE 3: P/B CHART (X)
10
5
0
11/4/2013
*Source: Bloomberg

Book Value/Share
*Source: BPI Securities, Company Information
KEY RATIOS

FY12A

FY13A

FY14F

FY15F

FY16F

Return on Capital Employed (%)

14.4%

18.4%

15.0%

19.1%

19.7%

Gross Profit Margin (%)

18.8%

18.6%

19.5%

19.3%

20.5%

EBITDA Margin (%)

19.8%

17.2%

18.5%

18.0%

19.2%

Operating Margin (%)

18.2%

15.2%

16.7%

16.2%

17.5%

Tax Rate (Effective) (%)

11.3%

16.2%

16.7%

18.3%

18.1%

Net Margin (%)

15.9%

13.0%

13.9%

12.7%

13.8%

11/4/2014 *Source: BPI Securities, Company Information

FIGURE 4: 9M14/3Q14 PERFORMANCE

in Php Millions

BPI Sec. 3Q14F

DNL 3Q14A

% Diff.

DNL 3Q13A

% Yoy

3,039

4,399

44.8%

2,746

60.2%

Gross Profit

608

675

11.1%

506

33.3%

Operating Income

524

541

3.2%

429

26.2%

Net Income

450

494

9.8%

387

27.7%

BPI Sec. 9M14F

DNL 9M14A

% Diff.

DNL 9M13A

% Yoy

Sales

8,508

10,624

24.9%

7,685

38.3%

Gross Profit

1,701

1,765

3.7%

1,430

23.4%

Operating Income

1,468

1,444

-1.6%

1,189

21.4%

Net Income

1,260

1,293

2.6%

1,042

24.1%

Sales

Philippine Equities Research

in Php Millions

*Source: BPI Securities, Company Information

Segment Performance: The bulk of DNLs 9M14 performance still comes

from its Foods Ingredients segment which grew its revenues 48% yoy and
net income by 31% yoy to Php551M. Specialty Plastics also grew its sales
by 16% yoy and net income 13% yoy to Php453M. Aerosols was the only
problem segment with its net income shrinking by 6% yoy to Php63M.
While we expect DNLs traditional segments to continue posting good
consolidated performance, by our numbers COAT should provide an extra
boost (more than 1% of FY14s base net income) to DNLs performance
during the last two months of 2014. We believe that COAT is a good
compliment to DNLs existing B2B business model, and in-line with DNLs
existing segments.
COAT Performance and Diversification: For 9M14, COAT grew its
revenues by 42% yoy and its net income by 65% yoy to Php382M. We
believe that apart from the strong performance of COAT thus far, DNL
stands to benefit from further diversification of its income streams. Before
The COAT consolidation, the Food Ingredients segment of DNL contributed
43% of overall DNL net income performance with Specialty Plastics being
the second biggest contributor at 35% of net income performance (using
9M14 figures). On a pro-forma basis, COAT would have contributed 25% of
total DNL net income performance for 9M14, Food Ingredients
contributing 36%, and Specialty Plastics contributing 29%. We believe this
diversification will help DNL deliver more stable net income performance
moving forward.

APPENDIX | ANALYST CERTIFICATION

We/I, Thomas Earll Huang, certify that the views each of us/I has/have expressed in this research report/material reflects each of our
respective personal views/my view about the subject stock covered. We/I also certify that we receive compensation based on the overall
revenues and/or profitability of BPI Securities Corporation ("BSC"). No part of our respective compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or view expressed in this research report.
General Investment Disclosures

Philippine Equities Research

What our ratings mean?

BUY

stock offers share price upside of > 15% vs. price target over the next 6 to 12 mos

O/P (outperform)

stock offers share price upside of > 0% to 15% vs. price target over the next 6 to 12 mos

U/P (underperform)

stock offers share price downside of >0% to 15% vs. price target over the next 6 to 12 mos

SELL

stock offers share price downside of > 15% vs. price target over the next 6 to 12 mos

NOT RATED

no recommendation
Key investment metrics

EPS

Earnings per share (P)

P/E

Price-to-earnings multiple (x) = Current mkt price divided by EPS

EPS cons

EPS consensus

P/B

Price-to-book multiple (x) = Current mkt price divided by book value per share

Div yield

Dividends per share / Current Market Price per Share

ROE

Return on equity = (Net income/Average Shareholders Equity)

ROA

Return on assets = (Net income/Average Total Assets)

FCF

Free Cash Flow = Cash Flow from Operations Capital Expenditures

FCFE

Free Cash Flow to Equity = Net Income Capital Expenditures Change in Working Capital - Net Debt

FCFF

Free Cash Flow to Firm = EBIT Taxes + Depreciation & Amortization Capital Expenditures Change in Working Capital

PEG

P/E / Annual EPS Growth

PV

Present Value

NPV

Net Present Value

Interest Coverage Ratio

Interest Coverage Ratio = EBIT / Interest Expense

EV

Enterprise Value

EBIT

Earnings Before Interest and Taxes

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization

WACC

Weighted Average Cost of Capital

CoE

Cost of Equity

Terminal growth rate

Beta

Risk associated with the equity; 1 being average risk of the market while numbers above are riskier and below less so

Net Debt

All Interest-bearing Debt Less Cash and Cash Equivalents

Net Debt/Equity Ratio

All Interest-bearing Debt Less Cash and Cash Equivalents / Shareholders Equity

ROCE

Return on Capital Employed = EBIT / Capital Employed

Operating Margin

Operating Margin = Operating Income / Sales

EBITDA Margin

EBITDA Margin = EBITDA / Sales

Abbreviations

CAGR

Compounded Annual Growth Rate

Cons

Consensus

EPS

Earnings per share

L-T

Long-term

Growth

GR

Growth Rate

Million

Mkt Cap

Market Capitalisation (Number of Shares x Market Price per Share)

M-T

Medium-term

NR

Not Rated

PM

Bloomberg code

S-T

Short-term

Shr

Share

T/O

Market Turnover

Yoy

Year-on-year

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