Dairy Farm Int'l - CIMB Research 2015-12-09: The road to recovery is never smooth

DAIRY FARM INT'L HOLDINGS LTD D01.SI

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.

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).

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.

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.

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.

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 | http://research.itradecimb.com/ 2015-12-09

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