Dairy Farm - RHB Invest 2019-08-05: Nothing To Milk At The Moment


Dairy Farm - Nothing To Milk At The Moment

  • Maintain NEUTRAL with lower Target Price of USD7.38, 3% downside plus 3% yield.
  • Dairy Farm International (SGX:D01)'s 1H19 PATMI of USD177m was below expectations. Adoption of IFRS 16 has depressed headline PATMI by c.USD50m, based on our estimation. On a like-for-like basis, sales declined 3% y-o-y while core PATMI grew by 5%, thanks to higher contributions from associates.
  • We cut our FY19F-21F numbers by 26- 30% due to the poor set of results and wider-than-expected negative impact from the adoption of IFRS 16.

Results missed expectation due largely to pre-opening expenses at the home furnishing segment.

  • While the home furnishing segment saw revenue growth of 7% y-o-y in 1H19, operating profit fell by 43% y-o-y (USD15m) as a result of pre-opening expenses.
  • Dairy Farm International plans to expand the number of IKEA stores from 11 to 17 in two years. Currently five new stores (three in Indonesia, one in Taiwan and one in Macau) are under construction and another is under conversion from Giant to IKEA. As most of the IKEA stores are expected to be completed by next year, we now forecast for pre-opening costs to widen in FY20F, eating away more margins.

Health and beauty continued to hold up.

  • The segment continued to deliver revenue growth of 10% y-o-y with 0.2ppts margin improvement. According to management, growth was largely attributed to North Asia, improvements in Indonesia and Malaysia, as well as the consolidation of revenue from Rose Pharmacy following the acquisition of the remaining 51% stake in October last year.
  • Management cited that sales growth in Hong Kong is still doing better than industry despite the ongoing protests. However, we are cautious of earnings growth in 2H19 as sales growth of Hong Kong’s medicines and cosmetics industry turned negative in June.

Food segment was flat.

  • Food revenue declined 8% due to the divestment of Rustan Supercentres and the rationalisation of ASEAN supermarkets. As Rustan was previously not profitable, there is limited impact on operating profit.
  • Convenience stores were also flattish due to start-up costs.

Maintain NEUTRAL.

  • Key growth for the group comes from its associates, which posted 40% y-o-y growth. Nonetheless, contributions from associates still came below expectations due to negative impact from IFRS 16.
  • We think that any near-term upside from growth at the health & beauty segment in mainland China and Rose Pharmacy would be offset by higher pre-opening costs at the home furnishing segment, while the supermarket segment is expected to require a longer time to show meaningful recovery.

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-08-05
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 7.38 DOWN 8.250