Dairy Farm Int'l - CGS-CIMB Research 2019-08-05: 1H19 Still In Reset Mode


Dairy Farm Int'l - 1H19 Still In Reset Mode

  • Dairy Farm International's 1H19 core net profit made up 50%/47.2% of our/consensus’ adjusted (for IFRS 16) FY19F numbers, mainly on firmer associate income.
  • We deem 1H19 a miss, as group sales fell (-2.8% y-o-y) on lower food sales; group core EBIT fell (-11% y-o-y) on weaker IKEA EBIT and high SG&A.
  • We downgrade Dairy Farm International from Hold to REDUCE and lower our Target Price to US$7.29 as we cut our FY19-21F EPS on weaker EBIT assumptions and IFRS 16 impact.

IFRS 16 adoption, historical figures restated down

  • DAIRY FARM INT'L HOLDINGS LTD (SGX:D01)’s FY18 net profit was restated down by US$82.5m with the adoption of IFRS 16 Leases. As such, we adjust our/consensus FY19F forecasts down by US$82m to US$356m/US$410.8m (vs. US$438m/US$455m) to be compared in-line with Dairy Farm International’s reported 1H19 figure of US$178.0m, where it accounted for 50.5%/47.2% of our and consensus’ full-year numbers.

1H18 sales fall 2.8% on weaker Food sales

  • Group sales fell by 2.8% mainly on weaker Food division sales (-12% y-o-y). Southeast Asia (SEA) sales were the main culprit, shrinking due to deconsolidation of Rustan’s supercenters and continual space optimisation plans. In North Asia (NA) upscale HK Food sales grew but the Taiwan food business saw increasing local competitor threat.
  • We previously penciled in a 5% y-o-y growth in FY19F, but with 1H19 registering weakness, we think full-year sales may now miss our earlier expectations.

EBIT declines with weaker IKEA and higher SG&A

  • Core group EBIT (ex. IFRS adjustments) fell 11% y-o-y (vs. our +3% y-o-y FY19F). Lower Food sales hampered EBIT growth. Home & Furnishings (H&F) segment’s EBIT fell 43.4% y-o-y on higher COGS and pre-operating costs for upcoming stores. And there were higher SG&A costs (+69% y-o-y).
  • Again, we had earlier expected 5% y-o-y growth in FY19F.

North Asia faces uncertain 2H19, more stores for IKEA

  • Dairy Farm International’s North Asia (NA) EBIT saw margin pressures in 1H19 likely due from Macau and Taiwan. But further pressure in HK could emerge in 2H19F given that visitor numbers to HK could soften due to the current protests, amid the already uncertain retail outlook (our HK analyst expects retail sales to decline in FY19F).
  • IKEA may still see low margins with five more stores coming onstream up till FY20F. High SG&A will be maintained as Dairy Farm International sees current levels as necessary for long-term transformation.

Downgrade to Reduce, near-term doubts outweigh long-term gains

  • We like that ongoing transformation will pave the way for a stronger Dairy Farm International in the long term but near-term uncertainties could temper earnings growth, and in-turn also investor sentiment, at least until the uncertainties dissipate.
  • We cut our FY19-21F EPS by 18- 22.1% as we input the effect of IFRS 16 and lower our EBIT assumptions. Our new Target Price of US$7.29 (US$8.54 previously) is based on our estimate of CY20F EPS ex IFRS 16 impact and still based on CY20F P/E of 23.5x (close to -0.5 s.d. to average 5-year mean).
  • We believe a better entry point is closer to US$7.00. Upside risks are better sales.
  • De-rating catalysts include weak sales and margins.

Cezzane SEE CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-05
SGX Stock Analyst Report REDUCE DOWNGRADE HOLD 7.29 DOWN 8.540