Dairy Farm Int'l - CGS-CIMB Research 2019-03-01: 4Q18 Biting The “SEA-food” Bullet


Dairy Farm Int'l - 4Q18: Biting The “SEA-food” Bullet

  • DAIRY FARM INT'L HOLDINGS LTD (SGX:D01)’s FY18 core net profit of US$424.3m (-9% y-o-y) was below at 90.7%/86.6% of our/consensus FY18 estimates.
  • An extensive review led to restructuring costs of US$453m for food division. Despite refining strategic plans, CEO said there is no silver bullet.
  • Maintain HOLD. Our lower Target Price of US$8.54, on lowered FY19-20F EPS, is still based on 23.5x FY20F P/E.
  • Transformation requires more time.

Reported net profit hit by one-offs, core net profit down 9% y-o-y

  • Dairy Farm International’s FY18 reported net profit of US$92m was a negative surprise; but included US$453m of one-offs mainly attributable to the Southeast Asia Food division. That said, core net profit was also uninspiring at US$424.3m down 9% y-o-y, as core EBIT shrank 3.2% on an extremely weak supermarket/hypermarket format (-74.8% y-o-y).
  • Higher interest costs (+35% y-o-y) and weaker associate contributions (-6.6% y-o-y) did no favours.

SEA-food still no light; associates also soften

  • It was painful to see Dairy Farm International’s supermarket/hypermarket EBIT margins of 0.6% (vs. average of c.3% in FY13-17). Main culprits were still the extremely weak Southeast Asia supermarket/hypermarket format (especially Giant) but North Asia was also lacklustre with HK and Macau facing costs pressures.
  • Associate contributions, significant bottom-line drivers in FY16-17; contracted in FY18 as only nine months of Yonghui earnings were included (its 4Q18 has yet to be announced). Yonghui contributions were also impacted by new employee incentive scheme costs and losses from new retail formats.

Health and beauty (H&B) the silver lining, IKEA still growing

  • The Health & Beauty (H&B) EBIT rose 59.3% y-o-y on exceptional performances of Mannings in HK and Macau, whilst the Guardian banner in Malaysia and Indonesia performed well.
  • IKEA profits were maintained despite store opening costs. As such, management is positive on the segment and is still investing in new stores.

Reset, reshape, transform

  • Ian McLeod, who has been CEO for about a year, highlighted Dairy Farm International’s new management team is in. His “3 Phase Multi-Year Plan” and “five strategic priorities” (Figure5 and Figure6 in attached PDF report) are also in place.
  • Besides defending HK strength and growing China presence, much talk was on revitalising Southeast Asia, which involved identifying “fit-for-purpose” propositions for Fresh Food and Grocery, given the previous under-investment.

Maintain HOLD as its time has yet to come

  • We sense that large one-off costs may be in the past, but significant recovery may only emerge from CY20F onwards, in our view.
  • We cut our FY19-20F EPS by 12.6 -15.1% as we impute lower food margins. Our changes lead to lower Target Price of US$8.54 still based on FY20F 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 | https://research.itradecimb.com/ 2019-03-01
SGX Stock Analyst Report HOLD MAINTAIN HOLD 8.54 DOWN 9.770