RHB Securities 2015-08-03: Dairy Farm - 1H15 Results. More Short-Term Pain Expected. Downgrade to NEUTRAL.

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/