Dairy Farm International - CGS-CIMB Research 2019-12-09: Hong Kong On Pause Mode


Dairy Farm International - Hong Kong On Pause Mode

  • The HK retail situation would only improve in 2H20F at the earliest, in our view.
  • This is negative for Dairy Farm International’s (DFI) North Asia segment, which has been the main earnings contributor in the past three years.
  • We prefer to wait for better entry points post its 4Q19 results (in Feb 20). Target Price of US$5.40 is based on 22x CY20F P/E (-0.5 s.d. to its 12-year average).

A slow year, made tougher by ongoing volatility in HK

  • DAIRY FARM INTERNATIONAL (SGX:D01) started the year on a slow note, with 1H19 revenue falling 2.8% and flat y-o-y net profit growth. However, things worsened from Jun 19 onwards, when Hong Kong, its major market, was struck by protests.
  • In its 3Q19 interim statement, Dairy Farm International stated that the weak trading operations of its HK business, especially Mannings and Maxims, would more than offset any benefits it reaped from its ongoing transformation programmes.
  • In Oct 19, provisional HK retail sales declined 24.3% y-o-y and visitor arrivals to Hong Kong fell c.43.7% y-o-y — these were even before the protests escalated into more violence in mid-Nov.
  • See Dairy Farm Announcements; Dairy Farm Latest News.

2020 Outlook

  • In early-Nov 19, our HK consumer analysts turned more bearish on HK’s situation. While protests could fade in early-or mid-2020, the negative repercussions on HK’s retail sector could persist for at least a year as it takes time to regain tourists’ confidence, especially those from mainland China (who have made up more than 70% of total visitor arrivals in Hong Kong since 2012).
  • We have forecast FY19F revenue/net profit to fall by 4.6%/6.3% y-o-y, namely due to the softness in Dairy Farm International’s health and beauty division (which has been the main growth engine in the past two years) and Dairy Farm International’s restaurant business, which we believe is largely driven by its HK operations.

Maintain REDUCE as the coast is not clear

  • We remain wary of Dairy Farm International due to the persistent uncertainties in Hong Kong.
  • We believe the stock could trade at the average valuation of its downturn year in 2015, at least till uncertainties dissipate. Hence we ascribe a P/E of 22x on CY20F EPS (-0.5 s.d. to its 12-year average). See Dairy Farm Share Price; Dairy Farm Target Price; Dairy Farm Analyst Reports.
  • Upside risks are a swifter-than-expected resolution to the HK protests, better sales growth and margin expansions.
  • Potential de-rating catalysts include continued HK protests, as well as weaker sales and margins.

Cezzane SEE CGS-CIMB Research | https://www.cgs-cimb.com 2019-12-09
SGX Stock Analyst Report REDUCE MAINTAIN REDUCE 5.400 SAME 5.400