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Summary of Broker’s Recommendation
|Company Name||D&L Industries Inc.|
|Opinion Issued on||23 May 2023|
|1-Year Target Price||PHP 10.00|
We retain our target price (TP) of Php10.00 for DNL and reiterate our BUY
recommendation despite the lower-than-expected earnings as we’ve priced in
the declining volumes from the 4th quarter (4Q) 2022) on our valuations, and believe that DNL is still in the position to recoup their lost volume and benefit from the lowering commodity prices.
Our Target Price implies a share price upside of 28.5% and a total return potential of 31.5%, which includes a 2023 dividend yield of 3.0%.
Analysis and Opinion
1Q 2023 performance dragged by inventory overhang
D&L Industries (DNL) posted a 1st quarter (1Q) 2023 net income of Php594 million, 24% lower year-on-year (y/y) and behind our estimates. Consolidated net sales ended at Php8.4 billion, 16% lower y/y due to weak sales volume on Jan-Feb 2023 on inventory overhang.
Sales picked up starting March, ending 62% and 26% higher than the previous 2 months, respectively. Export sales were down 40% y/y to Php2.1 billion, contributing only 24% to total sales. Gross profit (GP) increased 4% to Php1.4 billion on better sales mix.
Overall profitability was dragged by higher operating expenses which grew faster by 27% y/y to Php506 million mainly due to rental expenses attributed to the Batangas plant, and interest expenses which more than doubled y/y to Php97 million due to higher interest rates, although already on similar levels quarter-on-quarter (q/q).
Normalizing sales mix and margin recovery
DNL’s sales mix has been deteriorating since 2019 and ended 2022 with 51:49 slightly in favour of High Margin Specialty Products (HMSP). The company is optimistic about the recovery of the sales mix with 1Q 2023 recording a sales mix of 64:36, in favour of HMSP, and similar to pre-pandemic levels.
Management believes that this level can be sustained and/or improved for the rest of the year given the economic reopening trend and the previous peak attained in 2019 at 69:31, skewed
In its segments, volumes were up in Oleochemicals (+23% y/y) and Consumer Products ODM (+90% y/y) while volumes were down on Food Ingredients (-25% y/y) and Specialty Plastics (-10% y/y). This mix translated to a decline in overall sales volume by 14%, largely attributable to the decline in the Food Ingredients as the segment is the top contributor to sales at 60% and net income at 34%.
We do believe this is a slight blip on the overall year due to their clients hoarding more inventories last year on supply chain bottlenecks experienced then and should normalize moving forward as was seen beginning March 2023.
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