Dairy Farm - RHB Invest 2019-05-29: Wait For Bargain Sales; Reduce To NEUTRAL


Dairy Farm - Wait For Bargain Sales; Reduce To NEUTRAL

  • Downgrade to NEUTRAL from Buy as Dairy Farm's share price edges closer to our USD8.25 Target Price, implying 3% upside and 2.8% dividend yield.
  • In view of the escalating uncertainties brought forth by the ongoing US-China trade war, and that the Dairy Farm's share price has rebounded from the low of USD7.34 in March this year, we think the stock is now fairly valued, and downgrade to Neutral.

Health & Beauty segment could see slower growth in 2H19.

  • Health & Beauty continued to deliver stellar results in 1Q19 across most markets. According to the interim statement, North Asia was still seeing strong tourist footfall. Malaysia and Indonesia also saw encouraging results. However, we note that total medicines and cosmetics retail sales in the Hong Kong market only grew 2.3% y-o-y in 1Q19.
  • Moreover, consumer confidence in Mainland China seemed to have been impacted by the US-China trade war, with retail sales growth slowing more than expected to 7.2% y-o-y in Apr 2019.
  • While YTD mainland tourist arrivals to Hong Kong grew in the mid-teens, we think growth in the Health & Beauty segment would slow down in 2H19 if consumer sentiment worsens.

Food division remains a drag.

  • Based on Dairy Farm International (SGX:D01)’s interim management statement, 1Q19 sales and profits from the food division continue to decline y-o-y. This is largely due to the store consolidation plan in the ASEAN region.
  • Our recent ground checks in Kuala Lumpur (KL), Malaysia and Singapore further suggest that the group still has quite a number of hypermarkets and supermarkets caught in poor locations or have not undergone store improvement programmes. We believe the restructuring programme is still very much ongoing. As a result, we think the ASEAN supermarket business is likely to stay in the red in FY19F.
  • In addition, Hong Kong and Macau markets, which were holding up the food division’s earnings, are seeing margin erosion due to higher rental and labour costs. The convenience store format is also suffering from higher operating costs. Consequently, we expect the food division to fare worse than last year.

US-China trade tensions may cap growth from associates.

Share price is likely to stay rangebound

  • Dairy Farm's share price is likely to stay rangebound, as the one-off growth arising from the full-year contribution of Yonghui (vs 9M contribution in FY18), maiden contribution from its RRHI associate, new acquisitions from Maxim’s and reduction in opex could mitigate downside risks in the Health & Beauty segment and weaker earnings in the Food segment.
  • In terms of valuation, Dairy Farm International is now trading at 22x FY19F P/E, similar to the peer average. See Figure13 in attached PDF report for peer comparison table.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-05-29
SGX Stock Analyst Report NEUTRAL DOWNGRADE BUY 8.250 SAME 8.250