Dairy Farm - RHB Invest 2018-05-21: Positive Interim Statement For 1Q18

DAIRY FARM INT'L HOLDINGS LTD SGX: D01

Dairy Farm - Positive Interim Statement For 1Q18

In its 1Q interim statement, Dairy Farm announced that its sales and earnings have increased y-o-y, driven mainly by the strong performance in its health & beauty division, and from associates, Maxim’s and Yonghui.
Its food segment is still booking weaker profits and margins. Meanwhile, sales growth has turned positive after two years of decline. Our recent channel checks in Singapore show that some of the new strategies highlighted in the last briefing have been implemented.
Maintain BUY, with a new USD9.66 Target Price offering 12% upside.

As expected, Dairy Farm’s health & beauty division continues to be its key growth driver, mainly led by strong demand from Chinese tourists in Hong Kong and Macau.
Its home furnishing segment’s performance has caught up with last year, despite gestational costs incurred by the new IKEA outlet in Hong Kong in 2H17. As such, we could expect the next three quarters to be stronger for this segment.

While profits remain soft, we note that sales growth has turned positive after two years of decline. Although ASEAN markets remain the key challenge, we have turned slightly more optimistic on its outlook.
Singapore, Dairy Farm’s largest market in ASEAN, has been enjoying a broad-based pick-up in demand. In addition, our channel checks in Singapore show that some of the new strategies highlighted by the new CEO, Mr Ian McLeod, in the previous briefing including space utilisation, merchandise displays and changes in product range have been implemented in some of the Cold Storage outlets. We believe these strategies would continue to be rolled out in more outlets, and its other network brands like Giant and Marketplace in the near future.
We also expect consumer confidence in Malaysia to improve post-general election. We believe the reduction of GST in the country, to 0% from 6%, is likely to boost consumer sentiment in the near term. The annual appreciation of MYR should also lend some support to sales figures.

We raise our Target Price on the back of a slightly higher earnings estimate and the expectation that its working capital will improve.
We understand the group has been clearing slow-moving general merchandise since 4Q17, and believe that its inventory turnover days may improve from here on.

Juliana Cai CFA RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-21

SGX Stock Analyst Report BUY Maintain BUY 9.66 Up 9.160