Dairy Farm Int'l - CIMB Research 2017-05-04: 1Q17 Update ~ Modest Increase In Operating Profits

Dairy Farm Int'l - CIMB Research 2017-05-04: 1Q17 Update ~ Modest Increase In Operating Profits DAIRY FARM INT'L HOLDINGS LTD D01.SI

Dairy Farm Int'l - 1Q17 Update ~ Modest Increase In Operating Profits

  • DFI released its 1Q17 interim statement, but provided very little colour.
  • Continued margin improvement drove profits up yoy, but sales were down.
  • Our EPS forecasts and target price are intact. Maintain Add.

Recap of strategy for FY17

  • Management iterated during 4Q16’s analyst briefing that the strategy for FY17 is to drive sales while maintaining margins. Our view then was sales growth is inherently harder than margin expansion, but that we liked their broad strategy.
  • Unfortunately, Dairy Farm’s 1Q management statement would suggest that we were right. The silver lining is that the company was able to build upon FY16’s momentum and continued to improve margins. We think the benefits of their store rationalisation initiatives in 2015-16 are still flowing through.

1Q17 sales was down, but profits were up on better margins

  • Overall, the group reported lower sales, but improved operating margins in certain segments which mitigated the softer sales. Operating profit was therefore “modestly” up.
  • Management cited a challenging Chinese New Year and the absence of an extra leap-year trading day in 2016 as reasons for the softer sales. We interpret this as still subdued consumer discretionary spending, and believe the problem markets were Southeast Asia. 
  • We believe their Greater China markets did well, especially since overall Hong Kong tourist arrivals were up 3.7% in 1Q17, with mainland arrivals up 3.8% yoy.

Food division the only drag

  • Food division reported marginally positive sales in Greater China but weaker sales in Southeast Asia. Operating profits were therefore below.

Health and Beauty did well, ahead of our expectations

  • Recap that health and beauty was the group’s only problem segment in FY16. We are therefore positive as this segment reported higher sales and profits.
  • Home furnishings and associates had a strong quarter
  • Home furnishings, together with associates Maxim’s and Yonghui all reported a strong quarter, with better sales and profits.

Thesis intact; maintain Add

  • Our recovery thesis on Dairy Farm is intact. Continued margin improvement in 1Q reinforces that the company has truly turned around. 
  • Even as sales growth has not come through for the group yet, our interpretation of 1Q’s management statement is that only the food division in Southeast Asia saw declining sales. The other segments/markets are actually doing well.
  • Our EPS forecasts are intact and target price unchanged at US$9.18 (still based on 23.7x CY18 P/E, -0.5 s.d.). 
  • We think the stock could re-rate higher upon positive sales growth. Downside risk includes margin deterioration.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-05-04
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 9.180 Same 9.180