COMPANY VISIT

July 18, 2017

DNL improves margins and exports

This year, the market leader in customized specialty products is growing
its topline through its export sales and its bottomline through margin
expansion. This be possible by continuously investing in research and
innovation.

D&L Industries, Inc. (DNL) has four principal business lines

2017 Revenue Drivers namely, food ingredients, colorants and plastics additives,
Consumer spending and GDP growth play a big factor in DNLs aerosols, and oleochemicals, resins and powder coatings.
revenue as it manufactures and supply raw materials to other DNL also toll manufactures a range of related products,
including insect control, industrial maintenance chemicals, and
consumer firms. This year, it is expecting to grow its earnings by 15% - home and personal care products, among others.
19% at the back of the strong Philippine economy.
24% of DNLs revenues are from its export. 44% of exports are from
Stock Information
food ingredients, 28% from plastic and 28% from others products. Its
exports sales should grow, pushed by the contributions of the foreign Last Price P12.48
firms Ventura and Bunge. Bunge is exclusively exporting DNLs Performance (YTD) 9.47%
coconut oil in Asia Pacific while Ventura is selling DNLs food 52-week range P9.44 P13.64
ingredients in China, Hong Kong, Japan, and Indonesia. The firm is
Beta 0.99
looking to further expand its export business.
Outstanding Shares 7.14bn
Market Capitalization P89bn
CONSOLIDATED REVENUES Free Float Level 31.26%
Low Margin Commodities High Margin Specialties Par Value P1.00
Sector Industrial
Subsector Food, Beverage & Tobacco

61% 62% Major stakeholders 57.47% Jadel Holdings, Inc.

Fiscal Year Dec. 31
HOLD
Previous Rating
P13.00
Board of Directors
39% 38%
Chairman Emeritus Dean L. Lao
President & CEO Alvin D. Lao
2016 2015
CFO and CCO Amorsolo M. Rosario
DNL derives majority of its revenues from specialty products with high Yin Yong L. Lao
margin. These products are innovative-driven and cater to fast growing Alex L. Lao
market. The more customized the product is, the higher the profitability. Directors Cesar N. Bautista *
For example, the toy sensation Hatchimal was made up from DNLs Filemon T. Berba, Jr. *
specially developed product. *Independent Directors
For 2017, DNL plans to boost its high margin products segment. This RCDC Research
would expand the firms margins and lessen its dependence on volatile
Patricia S. Pascual
commodity prices.
Email: pspascual@reginacapital.com

Currency and Inflation risk

Since 55% of DNLs raw materials are exports it is highly exposed to
forex volatility as well as inflation rate. The expected low peso is
advantageous to the firm this year. To mitigate the latter risk, it can
easily pass the price changes to its customers.
When the firm develops the formulation of products for its clients, DNL
do not transfer the R&D expenses to the clients. DNL pays for the
expenses so they could own the formulation, making them the
exclusive supplier for that product an ultimately giving them leverage
over their customers.
Business Segments Performance
Business Segment Result
6%
13%
109%

42%

Food ingredients Colorants and plastic Oleo chemicals, Aerosols

additives resins and powder
coatings

2015 2016

DNL has been growing all its business segments. Food ingredients
segment contributes majority of the revenue. However, its revenue
share declined from 44.91% in 2015 to 37.34% in 2016 to pave way
to the remaining segments which are rising as well.
Specialty plastics significantly grew y/y due to the rising disposable
income in the country and the recovery of wire harness-related
exports.
The least revenue contributor Aerosols exhibited double digit growth
in 2016, mainly due to its fastest growing segment Personal Care.
Also, aerosols sales should continuously improve as the firm takes
advantage of the low penetration rate in the country.
Biodiesel Supply
Diesel Additional
Demand Low Reqt/Fuel
Demand Blend Plants
Carbon Senario Displaced
(Mli) Required
Year (Mli)
2017 7,310 5% 365 -
2018 7,508 5% 375 -
2019 7,710 5% 386 -
2020 7,923 10% 792 10
2021 8,092 10% 809 -
2022 8,251 10% 825 -
2023 8,405 10% 841 1
2024 8,557 10% 856 -
2025 8,694 20% 1,739 20
2026 8,781 20% 1,756 -
2027 8,864 20% 1,773 1
2028 8,920 20% 1,784 -
2029 8,997 20% 1,799 -
2030 9,031 20% 1,806 1
Source: Philippine Department of Energy
DNL is keen in the future growth of renewable energy in our country.
Currently, it has BioActiv brand, a coco-biodiesel launched in 2006
from its subsidiary Chemrez. It is the leading producer of biodiesel in
the Philippines in terms of installed capacity.
Demand for biofuel should grow especially with the mandated blend
of biodiesel with locally distributed diesel and gasoline from 5% in
2017 to 10% and 20% starting 2020 and 2025, respectively.
Increased dividend payout

The firm has been consistently declaring dividends. This year, DNL
declared P0.235 dividends per share with a 1.9% dividend yield based
on July 12's closing price. This amounts to P1.68bn, 18% increase from
last year and has a total payout ratio of 64% of prior year's earnings.

Continuous Expansion

Capital Expenditure
450 0.5
0.43
400 0.45
350 0.37 0.4
300 0.32 0.35
0.3
250
0.25
200 400
0.2
150 298 315
0.15
100 0.1
50 0.05
- 0
2015 2016 2017E
CAPEX (Php mn) EPS

The 2017 capex is set between P400mn to P420mn, 15% to 20% higher
than last year, to expand the capacity of its existing plants.
Although DNL's plant capacities are not yet in the critical levels, they
have to plan ahead for the said capacity expansion since it would take
up two to three years to expand. It is also in line with the expected
increase in demand for its specialty food ingredients, plastics and
chemical products from its domestic and international clients.
DNL has been growing organically. However, it mentioned that it has
already been considering potential firms to be acquired but it has yet to
finalize its choices as some did not fit the criteria.
Technical Analysis

DNL has recently breached its 50-d MA resistance and it is now trying
to trade above that newly set support. However, momentum has
slightly faltered and remains flat in the mid-level. DMI lines have also
converged showing bearish tone. It will struggle to sustain its short-
term upward trend. However, MACD and histogram are still going up.
This could fuel DNL to test its immediate 100-d MA resistance, if it
succeeds and stay above that level, chances are it will be bullish in
the medium run.

Buy on breakout

Support: 12.23 / 11.93

Resistance: 12.66 / 13.17