Hit by rising costs
- 1H15 earnings below expectation as margins were hit by higher costs.
- Efforts to drive operating efficiency in the longer term.
- Lower FY15-17F earnings by 15%-23%.
- Downgrade to HOLD, lower TP to US$8.54.
1H15 below expectations.
- Headline revenue and earnings for 1H15 were US$5.6bn (+6% y-o-y) and US$192m (-18% y-o-y) - below our and consensus estimates.
- While revenue was in line, earnings disappointed on higher rental and labour costs.
- DPS was maintained at 6.50 UScts per share, below our expectations.
Driving long term efficiencies.
- We see DFI strengthening its operations regionally for the long term, with much of the focus geared toward improving operating efficiencies.
- Areas include E-commerce, IT infrastructure, supply chain, and food and product safety.
- Growth will be supported by its private label program, new distribution centres in Malaysia and Singapore, new stores (second IKEA store in Indonesia and expansion of 7-Eleven stores and Mannings in China).
Lower margin expectations.
- 1H15 earnings were weak, forming only 36% of our initial FY15F earnings estimates.
- The drag came mainly from higher costs and disappointing margins.
- We revise our FY15-FY17F EBIT margin assumption from 4.8-5% to 3.7-4% to account for the weaker operating environment.
- Accordingly, we lower FY15F/FY16F/FY17F earnings by 15-23%.
- We see margins recovering slowly over the longer term, on the back of better operating efficiencies.
Downgrade to HOLD and lower TP to US$8.54.
- Our SOTP-based TP is reduced to US$8.54 as a result of the earnings revision.
- We have imputed lower value to DFI’s core business (at US$8.06 from US$9.87) and higher net debt (at US$0.42 from US$0.18), offset by a higher valuation for Yonghui (at US$0.90 from US$0.73).
- Based on the revised forecast, DFI is trading at 24.8x FY16F earnings, close to historical average valuations.
- Downgrade to HOLD on lack of upside catalysts.
Analyst: Alfie YEO; Andy SIM, CFA
Source: http://www.dbsvickers.com/
