Dairy Farm - RHB Invest 2018-03-27: Could S.E.A. Supermarkets Turnaround?

Dairy Farm - RHB Invest 2018-03-27: Could S.E.A. Supermarkets Turnaround? DAIRY FARM INT'L HOLDINGS LTD D01.SI

Dairy Farm - Could S.E.A. Supermarkets Turnaround?

  • The food division has been challenging for Dairy Farm since 2015. Despite the stock being a consensus BUY, Dairy Farm’s FY17 core PATMI came in 5% below market expectations with the supermarkets business in S.E.A. being the key drag. 
  • In this report, we examine the reasons for its underperformance, and its new CEO, Ian McLeod’s initiatives to improve Dairy Farm’s results. 
  • Maintain our BUY call with new DCF-derived Target Price of USD9.16 (from USD9.53, 16% upside), as we expect improving performance on the back of the new initiatives.

Singapore is the largest component 

  • Singapore is the largest component of Dairy Farm’s South-East Asia (S.E.A.) supermarkets business. Despite industry growth of 3.6% last year, Dairy Farm’s sales and profit underperformed in Singapore. We believe the inability in cope with rising competition as well as its store rationalisation exercise during 2015- 2016 were the key reasons for its loss of market share. 
  • Previous guidance to harness operational efficiencies through the setting up of a distribution centre also appears lackadaisical due to the change in its country CEO.

Could it turnaround? 

  • We believe competition has eased in 2018 as Amazon Prime now limits its services to paying members. The group began bidding for new stores in 2017, which should put it back in the game to fight for market share. 
  • As overall industry sales have been showing strong growth since 2H17, we believe same-store sales should improve on rising consumer confidence.

The worst is over for Malaysia. 

  • Weak consumer sentiment resulted in intensifying price competition, which hurt sales and margins. We believe the worst is over as domestic spending picks up this year. The group has since closed underperforming stores. 
  • The upcoming opening of a new distribution centre should translate into operational efficiencies this year, while YTD appreciation of the MYR is also positive for Dairy Farm.

Changing consumer shopping patterns is a structural issue in Indonesia.

  • The proliferation of mini-marts has led to consumers preferring to shop in smaller formats for convenience. General merchandise in hypermarkets is also increasingly unpopular, as the rising middle class chooses specialty stores for greater brand image. On this front, the group has identified the issue and cleared most of its slow moving stock in 2017. 
  • We expect short-term upside arising from an improved product range, faster inventory turnover, and lower write-offs in 2018.

New leader to save the day. 

  • New group CEO, Mr Ian McLeod, famous for turning around retail giant, Coles, came on board in Oct 2017. He pointed out operational changes that needed to be made, which could take a longer time to materialise. However, he mentioned that major store closures and stock clearances have been implemented in 2017. We believe this could lead to near-term margin upside in 2018. 
  • The acquisition of a 18.3% stake in Robinson Retail in the Philippines should lead to stronger associate contributions. 
  • We lower our estimates by 3-5% for FY18F-19F due to the lower FY17 earnings. Maintain BUY with revised DCF-derived Target Price of USD9.16. 
  • Key risks include USD appreciation against regional currencies.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2018-03-27
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 9.16 Down 9.530