Dairy Farm Intl - CIMB Research 2016-07-28: Health and beauty not a pretty sight

Dairy Farm - CIMB Research 2016-07-28: Health and beauty not a pretty sight DAIRY FARM INT'L HOLDINGS LTD D01.SI 

Dairy Farm Int'l - Health and beauty not a pretty sight

  • DFI’s 1H16 core net profit of US$199m (+3.4% yoy) was in line, forming 45% of our and Bloomberg consensus FY16 forecasts. 1H is seasonally weaker.
  • Little has changed. 1H16 sales were still weak and operating margins were down slightly. 1H16 group core EBIT was down 2.4% yoy.
  • The EBIT decline was due to disappointing performance by the health and beauty segment. All other store formats saw positive earnings growth.
  • DFI would have posted slight yoy decline in 1H16 net profit were it not for the additional quarter of contribution from associate Yonghui (acquired in Apr 2015).
  • Maintain Hold with an unchanged target price of US$6.75.

Still a tough trading environment; made worse by currencies

  • The overall trading environment in 1H16 has changed little and sales were still soft (-1% yoy but +2% in constant currency). 
  • Of all DFI markets, sales in Hong Kong appeared to be the best but this dragged down by Singapore and Indonesia, where store closures hit sales. The store closures did not come as a surprise. 
  • Management has been pruning underperforming stores since last year and we expect this to accelerate in FY16. We are positive on this strategy and think that it will translate into improved profitability.

Hampered by operating costs

  • Opex was the killer. 1H16 gross margin (GPM) improved to 29.6% (1H15: 29.2%) but higher rents and labour continued to impinge on overall profitability. Therefore, 1H16 EBIT margin fell slightly to 3.5% (1H15: 3.6%). 
  • A deeper look into the group’s segmental breakdown reveals that the problem area was the health and beauty segment. All other segments either maintained or posted slight improvement in margins.

Health and beauty dragged down the group’s earnings

  • Health and beauty, the group’s second-largest EBIT contributor (c.35% in 1H16), reported flat sales growth but an 11% EBIT decline on the back of lower EBIT margin of 6.7% in 1H16 (1H15: 7.5%). Hong Kong, Malaysia and Macau reported lower profitability yoy in 1H16. 
  • We think the lower number of tourist arrivals in Hong Kong and increase in promotional activities also contributed to weaker margins in 1H16.

Early signs that store rationalisation is working

  • The big positive from this set of results is that store closures appear to be resulting in higher profitability, as evidenced by Singapore and Indonesia. This was most pronounced in the supermarket segment that saw 1H16 EBIT growth of 4.1% yoy despite a 2.1% decline in sales. 
  • PT Hero will exit the Starmart business, likely by 4Q16. Home furnishing continued to do well, as expected, with 1H16 EBIT growth of 20%.

Maintain Hold

  • There are signs that management’s initiatives to improve margins are working. However, we note that 1H16 net profit would have declined slightly yoy were it not for Yonghui. 
  • In our opinion, it is too early to turn positive on DFI. We view the 3% dividend yield and 1 s.d. below historical mean P/E (now trading below) as key support levels. 
  • Maintain Hold. 
  • Our target price is based on 20x CY17 P/E (ASEAN peer average). Declared interim DPS of 6.5 UScts was on par with 1H15 and in line with our expectations.

Jonathan SEOW CIMB Securities | http://research.itradecimb.com/ 2016-07-28
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 6.75 Same 6.75