Dairy Farm International - CGS-CIMB Research 2018-12-14: Healing Pains


Dairy Farm International - Healing Pains

  • With North Asia food likely still facing cost pressures and softer Yonghui associate earnings y-o-y, we believe FY18F net profit growth may be minimal.
  • We reiterate that the near-term outlook for Dairy Farm International remains lacklustre, at least until the Southeast Asia (SEA) food business shows meaningful recovery.
  • We cut our FY18-20F estimates and maintain our call with a slightly higher target price of US$9.77, still on 23.5x P/E, rolled over to FY20F valuations.

No recovery yet in Southeast Asia food

  • In its 3Q18 interim statement, Dairy Farm International mentioned Singapore’s and Malaysia’s food sales and profits fell further, whilst Indonesia’s figures were better but still in the red. Singapore is likely to be in store rationalisation mode until early-FY19F, whilst in Malaysia, private consumption may moderate in 2019F, according to our economist, as FY18F was fuelled by forward purchases in the tax holiday of Jun-Aug 18.
  • 2H19F margins may pick up post shelving inefficient stores across the region but overall profits could still be slim.

North Asia food’s cost pressures may persist

  • In 1H18, the North Asia (NA) food business saw margin slippages (-17.5%), largely on higher rental costs in Hong Kong. This recurred in 3Q18, with Dairy Farm International stating the NA food business profits were lower vs. 3Q17 due to rental pressures.
  • Up till Oct 18, the Hong Kong Rental Price Index for Private Commercial Retail Units was positive y-o-y. Furthermore, property consultants are expecting rents to grow by at least 1-3% in 1H19F.

Yonghui profits forecast to shrink in FY18F

  • In 3Q18, Yonghui’s associate earnings were lower y-o-y on investments in new formats (i.e. e-commerce business/Super Species/Yonghui Lifestyle stores) and higher costs for its incentive schemes.
  • Consensus currently forecasts Yonghui’s net profit to fall 13% y-o-y in FY18F. This, coupled with the weakened US$ vs. RMB rate, could narrow Yonghui’s contributions in FY18F.

NA health & beauty may be impacted, if China visitors slow

  • The robust demand for HK cosmetics and healthcare products was mostly due to increased mainland China tourist arrivals. However, YTD, the Rmb has depreciated c.5.5% vs. HK$, while potential trade war uncertainties may weigh on consumer sentiments.
  • Whilst this could be a secondary concern, it poses a potential dampener on Dairy Farm International’s North Asia health and beauty segment, which has grown healthily so far this year.

Maintain Hold; near term still weighed by uncertainties

  • We cut our FY18-20F EPS estimates by 5.6-6.0% mainly on lower food business margins, lower Yonghui associate estimates and higher business support costs.
  • Our Target Price is now US$9.77 as we roll forward our earnings base to CY20F.
  • Upside risks are better sales growth and margin expansion in Dairy Farm International’s own and associate businesses. The opposite are downside risks.

Cezzane SEE CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-12-14
SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.77 UP 9.550