
Dairy Farm Int'l - The road to recovery is never smooth
- Dragged by poor ASEAN, all formats of Dairy Farm faced margin pressure in 1H15.
- We acknowledge the structural margins decline which Dairy Farm is experiencing.
- Noting that Dairy Farm’s performance has become uneven, we are expecting a stronger 2H.
- Potential synergies with Yonghui to boost bottomline.
- Maintain Add with an unchanged Residual-Income based target price of US$10.00.
■ 1H15: all formats saw margin pressures
- In 1H15, Dairy Farm sales rose at a commendable rate of 3% yoy. At constant FX, the increase would be 7% yoy. However, the sales growth was eroded by margins deterioration. EBIT margin dived from 4.8% in 1H14 to 3.6% in 1H15 as all formats experienced margin pressures.
- The group went from net cash as at end-14 into a net gearing of 0.4x as it completed the 20% acquisition of Yonghui (US$914m) and the San Miu supermarket chain in Macau (US$114m).
■ Dragged by poor ASEAN
- By geography, the supermarkets in Singapore continued to cede market share to Fairprice and Sheng Shiong while PT Hero was loss-making.
- Convenience store EBIT fell by 14% yoy due to a weak 7-Eleven Singapore. Even health & beauty, the group’s consistent star performer, declined 8% yoy in terms of EBIT owing to acute margin erosion in Malaysia.
■ The road to recovery is never smooth
- We acknowledge the structural margins decline which Dairy Farm is facing. We have modeled 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% in FY10-14.
- Noting that 1H is a seasonally weaker half, and that Dairy Farm’s performance has become uneven, we are expecting a stronger 2H.
■ Potential synergies with Yonghui to boost bottomline
- The acquisition of a 19.99% stake of Yonghui for c.US$914m was completed in early Apr.
- In Aug, in conjunction with JD.com acquiring a 10% stake in Yonghui for US$700m, Dairy Farm subscribed to more shares for US$201m, so as to keep its interests at 19.99%.
- Yonghui achieved a solid 1H15 performance and added US$4.3m to Dairy Farm’s bottomline. Propelled by store openings, Yonghui’s 1H15 net profit expanded 16% yoy to Rmb0.53bn.
■ Maintain Add on proxy for Asian consumption
- The recent share price weakness points to a favourable risk-reward. The stock is trading at 16x CY16 P/E, more than 2 s.d below its 5-year mean.
- On a longer-term view, we highlight that Dairy Farm is the largest Asian retailer ex-Japan, and is among the market leaders in the key markets it operates in – Hong Kong, Singapore, Malaysia and Indonesia.
- Its investment in emerging markets, the Philippines and Cambodia, should also help combat the rising threat of e-commerce.
YEO Zhi Bin
CIMB Securities
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http://research.itradecimb.com/
2015-12-09
CIMB Securities
SGX Stock
Analyst Report
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