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

Dairy Farm - DBS Research 2016-03-04: 2H15 in line DAIRY FARM INT'L HOLDINGS LTD D01.SI 

Dairy Farm - 2H15 in line 

  • FY15/ 2H15 results within expectations 
  • North Asia’s performance offsets decline in East Asia 
  • Final DPS of 13.5 UScts 

What's new 

• FY15/2H15 results within expectations. 

  • 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. 

• Weaker gross margins due to higher promotions. 

  • 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 DPS at 13.5 US cts. 

  • 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. 

Our view 

Low margins likely to persist 

  • 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. 

Maintain BUY, forecasts and TP subject to slight changes. 

  • 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