Dairy Farm Int'l - CIMB Research 2017-03-03: 2H16 Margin improvements beat our expectations

Dairy Farm Int'l - CIMB Research 2017-03-03: 2H16 Margin improvements beat our expectations DAIRY FARM INT'L HOLDINGS LTD D01.SI

Dairy Farm Int'l - 2H16 Margin improvements beat our expectations

  • Dairy Farm reported strong 11% yoy core net profit growth in 2H16, beating our estimates by 9%. FY16 core earnings formed 105% of our FY16F.
  • Our investment thesis has always been on margin improvements and the company did not disappoint. 2H’s group OPM was a strong 4.6% (1H16: 3.5%; 2H15: 4.1%).
  • By segment, the food division made the most progress with margin improvements in both its super/hypermarkets and convenience store formats.
  • Final DPS of 14.50 US$cts declared, bringing FY16 DPS to 21 US$cts (+5% yoy).
  • Maintain Add with a higher TP of US$9.18 as we lift our EPS estimates.

Earnings beat: no longer what went wrong, but what went right 

  • We had previously highlighted why we thought the group’s problem areas (overexpansion in Indonesia and Singapore markets) were behind them, and how we liked management’s focus on rationalising stores/driving productivity. 
  • DFI’s FY16 results showed just that. 2H’s OPM was a big improvement, and the key reason for the stellar core earnings growth (+10.8% yoy). FY16 core earnings formed 105% of our FY16F.

Food segment margin recovery earlier than expected 

  • Sales were flat, reflecting in part the group’s store rationalisation efforts. However, initiatives (higher mix of fresh, corporate brands and ready-to-eat offerings) to improve gross margins and control operating costs are now paying dividends. Accordingly, 2H’s OP grew by a stellar 21.8% yoy. 
  • New fresh food distribution centres being built in the Philippines (1H17) and Malaysia (2H17) and an increasing focus on direct sourcing (leveraging Yonghui’s relationship with mainland Chinese suppliers) are further upsides.

Home furnishings doing well in all countries 

  • Home furnishings again achieved record sales and operating profit in FY16, and are becoming increasingly more important to the group (now forms c.12% of group EBIT).
  • All countries are doing well, and home furnishings 2H EBIT grew by 4.8% yoy on the back of 6% sales growth. We are also positive on the group’s expansion plans to open a second Indonesian store and another store in Hong Kong (target: 2H17).

Health and beauty still a laggard, but some positive signs 

  • We think downside could come from the health and beauty segment, although the segment’s 2H performance also offers hope. Sales finally returned to positive growth (+5% yoy) in 2H16 although OP is still flattish (-0.3% yoy). This is much better after three consecutive halves of 10-20% OP declines. 
  • Problem areas that management will need to mitigate or turn around include soft mainland arrivals (HK), higher costs from rental increases (HK and Singapore) and competition (Malaysia).

Executing well, reiterate Add 

  • Overall, we are positive on the stock’s margin recovery initiatives that have flowed through the numbers earlier than expected. We are now confident that DFI has truly turned the corner. 
  • We lift our EPS forecasts on higher margin assumptions. Our target price therefore rises to US$9.18 (still based on 23.7x CY18 P/E, -0.5 s.d.). Maintain Add.
  • We think the stock could re-rate higher if sales recover. Downside risks include margin deterioration or weak consumption.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-03-03
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 9.18 Up 8.700