DBS Vickers 2015-08-03: Dairy Farm - 1H15 Results. Low tide. Downgrade to HOLD.

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/