Dairy Farm Int'l - CGS-CIMB Research 2018-07-27: 1H18 In Transition Stage

DAIRY FARM INT'L HOLDINGS LTD SGX:D01

Dairy Farm Int'l - 1H18 In Transition Stage

Dairy Farm's 1H18 core net profit of US$216.4m was within our expectation at 43.7% of our full-year estimate of US$495.3m, but below Bloomberg consensus' (41% of US$526m).
The Southeast Asia (SEA) food division continued to be its weakest link in 1H18, but its health and beauty division saved the day.
DFI announced an interim dividend of 6.5UScts for 1H18 (same as for 1H17).
Near-term outlook for food division remains sluggish but other divisions should make steady progress. Management and structural changes continue.
Estimates and Target Price remain unchanged but downgrade to HOLD (from Add) as we believe much of the positives have been priced following the stock's 16% rally YTD.

Despite 1H18 sales growth (+2.5% hoh, +7.7% y-o-y); core net profit (excluding one-off property sale gains of US$8.5m) pitched lower y-o-y growth of 2.1% and declined 15% against 2H17.
Main drivers of the topline gains were better performance in the health and beauty (+8.2% hoh/+20.5% y-o-y), and home and furnishings (-0.8% hoh/+14.1% y-o-y) divisions. But EBIT continued to be stifled by the SEA food division.
Sluggish Yonghui associate earnings (+13.4% hoh, -10.0% y-o-y) further capped net profit growth.

Its supermarket and convenience store divisions saw revenue growth; but EBIT narrowed to US$69.6m (-39.1% hoh, -34.2% y-o-y), largely on losses in the SEA supermarkets (-US$22m), leading to its overall sector EBIT margin falling to 1.7% (vs. 2H17: 2.7%, 1H17: 2.8%).
Main culprits in the SEA supermarkets were Malaysia and Indonesia which continued to struggle vs. competition, especially in the hypermarket format. Dairy Farm International guides that appropriate plans continued to be effected but may take time to bear fruit.

The H&B division saw good 1H18 performances in both the North Asia and SEA markets. North Asia delivered strong sales and profit growth on pick-up in number of mainland Chinese tourists whilst SEA saw healthier growth as format changes undertaken previously started to bear fruit.
Dairy Farm International guides that Malaysia, Indonesia and Vietnam reported better underlying results in 1H18.

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Maxims continued to grow in 1H18 due to expanded presence across mainland China and SEA, but Yonghui's associate contribution receded slightly due to investment costs involved in its new technology formats and introduction of employee incentive schemes.

A new leadership team is in place, with numerous newly created roles to take Dairy Farm International's business model from a devolved and fragmented structure to one that is centralised but still multi-faceted to cater to customer needs.
Dairy Farm International remains committed to preserving its Hong Kong strength and growing its Chinese business, and most importantly, in rejuvenating SEA, which will take time.

We are heartened by Dairy Farm International’s strategic changes and the unchanged 1H interim dividend to reward shareholders for their patience. However, we believe much of the positives have been priced in.
Further improvement in operational performances could emerge, but that could be closer to CY19F, in our view. Our unchanged Target Price of US$9.55 is based on CY19F P/E of 23.5x (about -0.5 s.d. to average 5-year mean).
Upside risks are better sales growth and margin expansion; the reverse are downside risks.

Cezzane SEE CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-27

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