DNL: 4Q18 earnings flat y/y but 2019 growth remains intact
BusinessWorld Online Subject of News Report: "DNL targets double-digit earnings growth this year" Date of Publication: Mar 6, 2019 Clarification of News Report: “LISTED plastics and oleochemicals manufacturer D&L Industries, Inc. (DNL) looks to continue its double-digit profit growth this year, after increasing its earnings by 10% in 2018. . . . . ‘We have elections this year, so that will be positive for our business…We should see better results this year 2019,’ Mr. Lao said. ‘Our target is double-digit growth in net income, so the minimum is 10%….We don’t see coconut oil prices remaining low for long. When prices recover, then revenues should go up as well,’ he added. . . . . DNL will push through with its P8-billion expansion at its facility in Tanauan, Batangas this year, which will triple its capacity in the next two to three years. This is seen to ramp up the company’s export business, since it will have to export half of total production as per rules for Philippine Economic Zone Authority zone locators. . . . .” We confirm the above-quoted statements.
4Q18 earnings remained flat at Php785 Mil. DNL’s net income in the fourth quarter of 2018
remained flat at Php785 Mil, brought about by lower volumes (-6%) from its high-margin
specialty products. DNL attributes the weakness of its HMSP segment to the negative sentiment
and consumer confidence brought about by the peak of inflation figures. This, alongside lower
commodity selling price, helped accelerate the rate of decline of its revenues for the quarter
(-18.8% y/y to Php6.4 Bil). Thankfully, commodity margins for the quarter reached a high of
15.2% (vs. 9.0% in 3Q18 and 4.8% in 4Q17) which helped offset some of the decline in HMSP
sales and caused earnings to still remain flat for the quarter.
For the year of 2018, DNL’s earnings reached Php3.2 Bil (up 9.7% y/y), slightly below both COL
and consensus estimates at 97.5% and 97.3% of full year forecasts, respectively. Revenues
declined by 4.4% y/y to Php26.5 Bil and were likewise below expectations, accounting for
only 93.3% and 92.4% of COL and consensus full-year forecasts, respectively. As discussed
earlier, the sudden drop in HMSP volumes caused revenues to miss forecasts. This was offset
by the 230 and 170 basis points improvement in its gross profit margin and operating profit
margin brought about by better margins across its HMSP segment and commodity segment.
Nevertheless, despite the slight disappointment in DNL’s results, management affirms that the
problem is not present in 1Q19 and 2019 should be rosy yet again.
Revenues temporarily drop as a result of HMSP volumes and lower commodity ASP.
As discussed earlier, DNL’s revenue for 4Q18 reached Php6.4 Bil, down by 18.8% y/y. This
brought revenues in the full year to Php26.5 Bil, below COL and consensus forecasts. Although
we anticipated a flat revenue growth for the year due to lower average selling prices of its
commodity segment, the sudden 6% decline in its HMSP volume in 4Q18 caused revenues
to miss our forecast. DNL believes that the only reason for the slump in volumes is due to
negative sentiment arising from peak inflation concerns, higher interest rates, and the weak
peso. For the quarter, we estimate that DNL’s HMSP revenues declined by around 10% y/y to
Php4.2 Bil. Meanwhile, commodity revenues dropped by around 30.1% y/y and to Php2.3 Bil.
All in all, these brought DNL’s full-year HMSP segment revenues to Php17.0 Bil (up by 4% y/y)
and commodity segment revenues to Php9.7 Bil (down by 17% y/y).
Again, despite the slight disappointment in DNL’s results, management affirms that the
problem is not present in 1Q19 and outlook for 2019 should be rosy yet again. We also think
that DNL will be one of the few names to benefit from election related spending this May, as
well as the much lower inflation uptick this 2019. These factors should help DNL achieve our
mid-teens earnings growth forecast this 2019.
GPM reached record-high 22.1%. Gross margin of DNL increased by around 5.2 percentage
points y/y to 22.1% in 4Q18 largely due to the jump in commodity GPM to 15.2%. In contrast,
commodity GPM in 4Q17 and 3Q18 was only at 4.8% and 9.0%, respectively. For the year 2018,
GPM expanded by 230 bps y/y to end at 19.1%. HMSP contributed 63% of total revenues
during the period, up from 58% for the whole of 2017. Aside from the better revenue mix, GPM
of its commodity products (biodiesel and refined vegetable oils) expanded by 5.9 percentage
points to 10.0% from 4.1% in 2017. However, we believe that the high level of commodity
margins is unsustainable and should eventually normalize to mid-single digit level given that
it is cyclical in nature.
On the flipside, GPM of DNL’s high margin specialty products continued its recovery as it
reached around 26% in 4Q18, bringing full-year GPM to 24.1% in 2018, just 70 bps lower than
its GPM in 2017. In contrast, its GPM in 9M18 was at 23.4%. DNL explained that the decline
during the first half of the year was merely due to the change in the sales mix of HMSP in favor
of lower margin HMSP in its Plastics and Aerosols segment. We believe that in 2019, margins
will continue to recovery on the back of better HMSP volumes. In fact, despite the drop in GPM,
DNL’s oleochemicals (+30% to Php1.2 Bil), plastics (+13% to Php762 Mil), and aerosols (+12%
to Php194 Mil) segment’s net income contribution showed a healthy increase in the year 2018.
Exports down 8% y/y on slower food ingredient sales. Revenues from DNL’s export segment
declined by 8% y/y in 2018 to Php6.3 Bil. Note that last year, revenues from exports surged by
68% y/y to Php6.8 Bil. Although the decline in DNL’s export segment may seem worrisome,
DNL explained that it is only due to the volatility of export revenues from its food ingredients
segment. DNL also stands by its expectations that its export revenues will grow in the long
run.
Maintain HOLD. We are maintaining our HOLD rating on DNL with a fair value estimate of
Php10.90/sh. At its current price of Php11.30/sh, DNL is trading at 21.6X 19E, at par with local
and global peer average of around 22X. Fundamentally, we like DNL because of its steady
sales volume growth and its resilience to rising input costs and the weak peso, which are
among the major threats facing most consumer companies today. However, valuations are
not yet compelling. We advise investors to wait for pullbacks to buy the stock.
