More Short-Term Pain Expected
- 1H15 results were below our/consensus expectations, with underlying net profit of USD193m making up c.34% of earlier full-year forecasts.
- Downgrade to NEUTRAL with a new USD9.10 TP (10% upside). Margin erosion in several ASEAN markets was exacerbated by currency weaknesses.
- We remain positive on the company’s strategic initiatives and market position, but expect near-term drags to persist into 2H15.
1H15 core profit down 14% YoY.
- Revenue was up 6% YoY, with growth across all segments and would have been higher at constant exchange rates.
- However, there was significant margin erosion at its supermarket/ hypermarket and health & beauty segments, resulting in 1H15 core net profit attributable declining to USD193m.
- We now expect full-year net profit to be lower vs FY14 levels.
Weak markets include Malaysia and Indonesia.
- These two geographical markets account for around 25% of revenue.
- Margin erosion was felt most keenly in Malaysia after the goods and services tax (GST) implementation, while the Indonesian operations continued to underperform.
- In Singapore, the 7-Eleven business continues to face pressure from the supermarkets which have implemented 24-hour operations.
- Home furnishing (IKEA) business outperformed, particularly in Taiwan and Indonesia.
Regional currencies likely a drag into 2H15.
- We believe margin pressures were exacerbated by weaker regional currencies (>60% in non-HKD) during the period.
- We expect this situation to persist, judging by the further weakness into August, particularly for the MYR and IDR.
Long-term positive but near-term drags; downgrade to NEUTRAL (from Buy).
- Dairy Farm’s strategic initiatives remain on track, including better procurement and IT investments.
- Decisions to introduce new fresh food distribution centres in Singapore and Malaysia will likely enhance margin when ready.
- We cut our FY15-17 earnings estimates by 13-16% and derive a new DCF-based TP of USD9.10 (from USD11.20).
- The company’s balance sheet remains strong (40% net gearing) despite completing the acquisition of a 20% stake in Yonghui (601933 CH, NR) in April.
- Its dividend of 23 cents (USD)/share should remain intact despite lower profits this year.
- The key risk to our forecasts is the weakness of regional currencies.
Analyst: James Koh
Source: http://www.rhbgroub.com/
