Dairy Farm - RHB Invest 2017-08-07: Post-Briefing Updates

Dairy Farm - RHB Invest 2017-08-07: Post-Briefing Updates DAIRY FARM INT'L HOLDINGS LTD D01.SI

Dairy Farm - Post-Briefing Updates

  • Maintain BUY on Dairy Farm with TP of USD9.53 (24% upside)
  • 1H17 PATMI grew 7% on decent growth in the higher-margin segments, despite a drop in revenue at the supermarket division. 
  • Moving into 2H17, we expect the health & beauty business and convenience stores to continue their steady performance on store expansion in China, as well as increased Chinese visitor arrivals to HK. 
  • Revenue from home and furnishing should also improve on increased accessibility – online websites set up and new store openings.

Health & beauty to rock on. 

  • The health & beauty segment was the star performer in 1H17, with decent revenue growth driven by increased Chinese visitors to HK, and increase store openings in China. Margin also improved significantly on lower rental pressure in HK, as highlighted in our 16 Jun report: Dairy Farm : Of Fresh And Beauty. 
  • In our recent visit to HK, we note that Dairy Farm’s Mannings stores continued to be crowded compared to peers like Bonjour. We expect the health & beauty business to continue its strong performance in 2H17, on positive YoY growth in Chinese visitor arrivals.
  • Likewise for convenience stores, overall sales were held up on the back of higher Chinese visitor arrivals, and store expansion in Guangdong, China. Convenience stores also recorded higher margin on the back of increased Ready-To-Eat (RTE) participation.

Supermarket division remains challenging, and was mainly dragged down by ASEAN markets. 

  • Revenue fell 3% in constant currencies term, and was down 5% in USD term. While this was partially due to lower number of stores, we note that its Cold Storage outlets were losing market share to Sheng Siong (SSG SP, NEUTRAL, TP: SGD1.05) and other independent players in Singapore. 
  • In Indonesia and Malaysia, while market shares in the supermarket and hypermarket space held up, the bigger formats were losing share to smaller formats eg mini-marts and convenience stores. 
  • With Amazon.com’s (Amazon) (AMZN US, NR) entry into Singapore in 2H17, we think the threat may be limited for now, as the product range provided by Amazon is still narrow. The fresh and private labels continued to see higher participation in 1H17, which we believe are good competitive advantages against online competition.
  • Moving forward, management cited that they would continue to invest in e- commerce but would like to strike a balance between cannibalising offline sales and converting consumer buying patterns. The Group would also work on providing relevant ranges in suitable formats for consumers.

Maintain BUY. 

  • We continue to believe that there is medium-term margin upside from the setting up of fresh distribution centres. But we note that near-term operating margins could still be eroded if weaknesses in sales persist. 
  • We lower our forecast by about 4% for FY17F-19F to reflect the challenges in the supermarket segment, resulting in a lower DCF TP of SGD9.53
  • Key downside risks include slowdown in consumption spending and higher costs.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-08-07
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 9.53 Down 10.000