Dairy Farm - DBS Research 2019-08-02: Still Transforming


Dairy Farm - Still Transforming

  • DAIRY FARM INTERNATIONAL (SGX:D01)'s 1H19 earnings below on disappointing sales, higher opex and lower than expected margins.
  • Interim dividend of 6.5 UScts declared.
  • Cut FY19-20F earnings by 18-20%.
  • Maintain HOLD with lower US$7.99 Target Price.

Maintain HOLD, lower Target Price to US$7.99.

  • We trimmed DAIRY FARM INTERNATIONAL (SGX:D01)'s FY19-20F earnings by 18-20% to reflect a more conservative growth outlook on a slower revenue growth environment, higher than anticipated operating costs including interest expense for SFRS (I) 16 lease accounting and HQ costs, and weaker associate/JV income growth.
  • We believe more time is needed for earnings to turnaround as the transformation plan takes shape. For now, we do not see any significant upside to the share price until signs of green shoots for the Southeast Asia food business are more visible.

Where we differ:

  • We believe Dairy Farm International’s outlook will be muted on higher HQ costs along with more time needed to turnaround its Southeast Asian supermarket/hypermarket business.

Potential catalyst:

  • Faster turnaround from its food business will depend on the successful implementation of Dairy Farm International’s new multi-year transformation plan.

WHAT’S NEW - Still undergoing transformation

1H19 earnings below:

  • Dairy Farm International's core earnings for 1H19 of US$179m (+5.9% y-o-y) was below expectations, on the back of US$5.8bn revenue (-2.8% y-o-y). Revenue was lower, affected by deconsolidation of Rustan’s in 4Q18 and space optimisation at its Food business in Southeast Asia.
  • Operating profit declined by 5.2% y-o-y to US$234m on higher operating expenses and business transformation costs. Higher associate/JV income (US$74m, +40.3% y-o-y) came from Yonghui and Robinson’s Retail in the Philippines which also helped to lift core earnings.
  • An interim dividend of 6.5 UScts was declared, in line with our expectations.

Food operating margin improved slightly:

  • Food revenue declined 8.4% y-o-y to US$3.8bn, led by supermarkets/hypermarkets segment (US$2.7bn, -13% y-o-y) affected by the deconsolidation of Rustan’s in the Philippines. Southeast Asia is showing signs of turning around along with sales growth in Hong Kong, while Taiwan sales remain challenging.
  • Operating margins for this division improved 0.1ppt to 1% as transformation plan is being progressively implemented.
  • Convenience stores’ sales grew 5% y-o-y to US$1.1bn, with contribution from all markets particularly Mainland China. Operating profit margin for this division was slight lower at 3.1% (-2ppts) due to increase in rents. Overall Food operating margin crept up 1ppt to 1.6% led by margin improvement from supermarkets/hypermarkets.

Health & Beauty remained strong:

  • Sales grew 10.3% y-o-y to US$1.6bn driven by North Asia. Operating margins also expanded by 0.2ppt to 10.5%.

Home Furnishing’s operating margin fell:

  • IKEA saw same store sales growth with revenue growing 7% y-o-y to US$371m but profitability was lower on higher COGS and pre-opening expenses for Taiwan and Indonesia stores. Operating margin dropped to 5.2% (-4.6ppts).

Overall operating margin declined slightly to 4.1%.

  • Overall operating margin fell by 0.1ppt to 4.1%. HQ costs increased 69% y-o-y to US$67.6m with margin declines coming from Home Furnishing and Convenience stores.

Associate/JV income lower than anticipated.

  • Associate/JV income came in at US$73.8m, below expectations as contribution from Robinson’s Retail in the Philippines and Maxim’s were lower than anticipated despite Yonghui’s contribution outperforming our expectations.

Cut FY19-20F earnings by 18-20%.

  • We lower our earnings further to factor in the poorer than expected 1H19 results. The disappointment came mainly from
    1. lower than expected revenue;
    2. higher than anticipated operating costs including interest expense for SFRS (I) 16 lease accounting; and
    3. lower than expected associate/JV income.

Maintain HOLD with lower US$7.99 Target Price:

  • Our Target Price for Dairy Farm International is reduced to US$7.99 subsequent to the earnings cut.
  • We see limited upside as growth is expected to be subdued. Management is currently implementing its transformation programme to improve business performance and achieve long term sustainable growth, which we believe may take a few years. We will therefore turn positive when signs of green shoots start appearing for the Southeast Asia food business.
  • Maintain HOLD.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-08-02
SGX Stock Analyst Report HOLD MAINTAIN HOLD 7.99 DOWN 8.440