Dairy Farm - DBS Research 2016-03-04: 2H15 in line

DAIRY FARM INT'L HOLDINGS LTD D01.SI

Dairy Farm - 2H15 in line

DFI’s FY15 and 2H15 earnings were within our and consensus’ expectations. Full year earnings were US$424m (-17% y-o-y) on revenues of US$11.1bn (+1% y-o-y).
Revenue was largely supported by North Asia (US$6.3bn, +6% y-o-y) - Hong Kong supermarkets, the acquisition of Macau’s San Miu, Hong Kong and Macau Health & Beauty stores, Hong Kong and China convenience stores, and IKEA stores in Hong Kong and Taiwan.
Hong Kong in particular, gained market share across Supermarkets, Convenience stores, and Health & Beauty segments with generally higher SSSG. This was however offset by decline in sales (US$2.5b, - 13% y-o-y) in East Asia (Malaysia, Indonesia, Vietnam and Brunei) dragged by Malaysia’s weak consumption and currency.
Indonesia sales and gross profit were higher as Giant recorded positive SSSG and a steady performance from Hero.
South Asia sales (Singapore, Cambodia, Philippines and India) grew +6% y-o-y to US$2.3bn, led by Singapore Health & Beauty segment.
7-Eleven sales were lower on alcohol restrictions and lower tourists, while supermarkets sales were slightly down on competition and lower prices.

FY15 gross margins declined by 0.4ppts to 29.5%, largely from more promotions to push sales. FY15 EBIT margins came down from 4.8% to 3.9% (above our 3.7% expectation), with declines seen across all formats and geographies except for IKEA.
Generally, there were higher costs on labour and rents in HK and Singapore, generally higher costs in Malaysia, and higher labour costs in Indonesia.
Associates/JV profit contribution grew 23% to US$85m led by contribution from Yonghui.
Net interest expense grew from US$2m to US$14m on higher debt for the Yonghui acquisition.

Final dividend was lower at 13.5 UScts, below expectations of 16.5 US$cts. This is largely due to the lower profits registered in FY15. In terms of dividend payout ratio, this is in line with 59- 69% range between FY09 and FY14.
Balance sheet is now in net debt position (US$482m) on financing raised for the Yonghui acquisition vs net cash of US$475m in FY14. Going forward, DFI is due to pay another US$200-210m (to maintain its 20% stake) for the additional investment into Yonghui as result of JD taking a 10% stake in Yonghui through a placement.
Working capital was stable from last year at 8 days for cash collection, 114 days credit for suppliers and 47 days for inventory. Operating cash remain strong at US$700m in FY15. This is well within US$676m and US$730m range generated between FY10 and FY14.

While overall performance in FY15 has been somewhat lackluster given the challenging macroeconomic conditions, it was within our expectations.
There is slow topline growth (+1%) along with higher opex and lower operating margins (-0.9ppt). Even then, higher sales of 1% came at the expense of a decline in gross margins (-0.4ppt).
The high cost base is likely to persist, especially labour and rents.
Besides DFI will continue to invest in new and existing stores, strengthen its brands, improve operations and enhance shopper experience across all formats. These initiatives will incur costs as well.
The saving grace is its c.US$700m cash generating capability funded by its suppliers. To that end, we look to refine our margin assumptions going forward.

Results are within expectations, with no significant disappointment or negative surprises. We therefore do not see major changes to our forecasts.
At current valuation of 19x FY16F PE and -1SD of its 8 year historical PE mean, we believe valuations are attractive.
It is also below Asean grocery retail peers, which are trading at an average of 23-25x.
Maintain BUY, with slight changes to TP (USD7.03, prev USD7.34) and forecasts (not significant). More updates to follow after analyst briefing on Friday morning, 4 March.

Alfie Yeo DBS Vickers | Andy Sim DBS Vickers | http://www.dbsvickers.com/ 2016-03-04

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 7.03 Down 7.34