CIMB Securities 2015-08-03: Dairy Farm International - 1HFY15 Results. The road to recovery is never smooth. Maintain ADD.

The road to recovery is never smooth 

  • Dairy Farm’s 1H15 core net profit of US$193m (-14% yoy) was below our and consensus expectations at 35% of our FY15 forecast. 
  • All formats saw margins pressures. 
  • ASEAN remained a drag while the exceptionally strong HK showed some normalisation. 
  • An interim DPS of 6.5 UScts was declared (flat yoy). The results were admittedly disappointing, particularly on the back of an encouraging 2H14. 
  • However, we also take heart from the positive performance of Yonghui. 
  • We cut our FY15-17 EPS forecasts by 9-17% as we factor in lower margins. 
  • This reduces our residual income-income based target price (implied 27x CY16 P/E, its 5-year mean) from US$10.90 to US$10.00
  • The recent share price weakness suggests an upside potential, with stronger 2H a re-rating catalyst. 

1H15 results: Sales growth eroded by margin deterioration 

  • Sales of US$5,593m (+6% yoy) were in line with our expectations. All formats recorded sales growth, though convenience stores and health & beauty published the weakest sales growth in recent years. 
  • Sales for continuing businesses rose by 3% yoy. 
  • At constant FX rate, the increase would be 7% yoy. 
  • However, the sales growth was eroded by margins deterioration. 
  • EBIT margin dived to 3.6% (1H14: 4.8%) as all format experienced margins pressures. Associates’ contributions increased 47% yoy to US$31.7m, thanks mainly to Yonghui. 
  • The group went into a net gearing of 0.4x (from net cash as at end-14) as it completed the 20% acquisition of Yonghui (US$914m) and the San Miu supermarket chain in Macau (US$114m). 

Margins pressures across all formats Supermarket/hypermarket 

  • EBIT fell 28% yoy in 1H15 as the exceptionally strong Hong Kong normalised somewhat. 
  • Singapore and Indonesia were particularly weak. 
  • Convenience store EBIT fell by 14% yoy due to weak Singapore performance. 
  • Even the consistent star performer, health & beauty, missed our forecasts, with its EBIT declining 8% yoy owing to acute margin erosion in Malaysia. 
  • Only IKEA and 50%-owned Maxim’s met our expectations. 
  • In view of the group’s uneven performances, and mindful of the weaker consumer sentiment and nimbler competition in ASEAN, we are now modelling in EBIT margins of 3.9-4.4% for FY15-17, and do not expect the group to touch its 5-year average of 5.4% (FY10-14), given the change in industry’s dynamics. 
  • Favourable risk-reward The recent share price weakness points to a favourable risk-reward. 
  • Despite the earnings cut, the stock is trading at 22x CY16P/E (-1 sd below its 5-year mean).

Analyst: YEO Zhi Bin

Source: http://research.itradecimb.com/