Dairy Farm Int'l - CIMB Research 2017-08-04: 1H17 One Black Mark But Many Bright Spots

DAIRY FARM INT'L HOLDINGS LTD D01.SI

Dairy Farm Int'l - 1H17 One Black Mark But Many Bright Spots

We deem Dairy Farm International (DFI)’s 1H17 core net profit of US$211m (+6.1% yoy) broadly in line, forming 43% of our FY17F forecast. Note that 1H is seasonally weaker than 2H.
1H17 group sales were down 1% yoy due to weak supermarket sales but EBIT margins held firm and associates did well. 1H17 group core net profit was up 6% yoy.

In our view, DFI’s 1H17 results were almost perfect in that all but one segment did well in terms of both sales and EBIT growth. The sole dampener was supermarkets/hypermarkets, with 1H EBIT down 19.5% yoy.
Nonetheless, 1H17 group core net profit (US$211m, +6.1% yoy) was broadly in line with our expectations, helped by the stronger performance of the other segments and better associates contribution (+33% yoy), as both Yonghui and Maxim’s did well.

We were slightly taken aback by the supermarkets/hypermarkets segment’s weak 1H17 performance.
1H17 sales were down 4.6% yoy, EBIT was down by an even bigger 19.5% yoy. Management attributed this to weaker trading conditions in Singapore, Malaysia and Taiwan, while profitability in Hong Kong and Indonesia was flat.
We think consumer confidence in Singapore and Malaysia is still weak, although we think Singapore offers some hope of improving consumer sentiment in 2H17F.

While supermarkets/hypermarkets saw EBIT margin decline (1H17: 2.4%, 1H16: 2.8%), the other segments did much better in 1H17. Accordingly, group EBIT margin was still marginally up yoy (1H17: 3.6%, 1H16: 3.5%).
Even the previously-troubled health and beauty segment saw a recovery in 1H17 as its EBIT rose 11.2% yoy, driven by better margins. Markets that did well were Hong Kong, Macau and Indonesia. However, Singapore and Malaysia reported weaker profitability (consistent with the overall weak consumer sentiment that hampered the supermarket segment).
Associates contribution (+33% yoy) also lifted the group’s overall earnings as both Yonghui and Maxim’s did well, driven by more stores and better margins.

Consistent with its historical payout, DFI announced an unchanged interim dividend of 6.5 UScts (2016: 6.5 UScts).

We think DFI’s 1H17 results would have been stellar if not for the disappointing supermarket/hypermarket segment. Nonetheless, we believe that the company’s previous margin woes are truly over.
We are also heartened by the 1H17 sales growth of the other segments, which we think is a potential key re-rating catalyst.
Our FY17-19F EPS forecasts are unchanged. Reiterate Add with an unchanged TP of US$9.18, still based on 23.7x CY18F P/E (-0.5 s.d. below historical average).
A downside risk is margin deterioration.

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-08-04

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