Dairy Farm - DBS Research 2020-03-06: Needs Time For A Successful Transformation


Dairy Farm - Needs Time For A Successful Transformation

  • Dairy Farm International's 2H19 earnings below as sales and margins disappoint.
  • Final DPS of 14.5 UScts declared.
  • Cut FY20-21F earnings by 10-12%.

Maintain HOLD, lower Target Price to US$5.20.

  • We remain neutral on Dairy Farm International (SGX:D01) as we believe that it needs time to execute its multi-year transformation plan. The COVID-19 outbreak in Asia has also dampened its growth outlook.
  • Following the disappointing FY19 results, we have trimmed FY20-21F earnings by 10-12% to reflect a slower turnaround than before. We expect the reorganisation to continue in FY20F with muted earnings growth before efficiencies kick in from FY21F.
  • Meanwhile, any upside to share price and earnings growth would be capped by the COVID-19 situation and subdued consumer sentiment.

Earnings below as sales and margins disappoint

  • Dairy Farm's FY19 earnings below. Core FY19 earnings of US$326m (-8.8% y-o-y) was below our estimates as both revenue and margins disappointed. Revenue came in at US$11,192, (-4.7% y-o-y), with operating margins declining 0.4ppt to 3.9%.
  • Pre-tax margins were also below expectations as Yonghui’s contribution to associates/JV income was below our estimate.
  • A final DPS of 14.5 UScts was declared, bringing full year DPS to 21 UScts, in line with expectations.

Sales slowdown led by supermarkets/hypermarkets:

  • The decline in FY19 sales was led by a 10.7% drop in Supermarket/Hypermarket sales to US$2,513m. While sales from Hong Kong and Macau rose, the decline was due to Rustan’s divestment and store optimisation in Southeast Asia.
  • Convenience stores grew 3.9% y-o-y to US$2,185m, driven by new store growth and strong same store sales in China. Health and Beauty sales rose 0.5% y-o-y to US$3,051m from stronger same store sales in Southeast Asia, China and Macau offset by Hong Kong contribution due to the social unrest.
  • Sales at IKEA stores grew 6.2% y-o-y to US$766m with strong sales growth from new stores, offset by slower same store sales in Hong Kong due to the social unrest in 2H19.

Lower operating margins:

  • Operating margins declined to 3.9% (-0.4ppt), dragged by lower IKEA (-3.9ppt, 5.6%) and Health and Beauty stores (-1.2ppt, 9.7%).
  • Food margins improved to 2.0% (+0.6ppt) with operating margins improving for supermarket/hypermarkets (+0.8ppt, 1.2%) compensated by lower convenience stores margin (-0.4ppt, 3.8%).
  • Overall, the margin decline was due to continued investments into the various business segments.

2H19 remained weak:

  • 2H19 sales and earnings performed weaker than both 1H19 and 2H18, affected by the social unrest in Hong Kong. There were some positives as overall gross margin improved to 32.4% in 2H19 while operating margins for supermarket/hypermarkets improved from the levels in 2H18 and 1H19. However, Health and Beauty, and IKEA stores recorded lower operating margins y-o-y in 2H19.

Cut FY20-21F earnings by 10-12%:

  • With a slow 2H19, we believe the outlook for FY20F would be muted with the spread of the COVID-19 in 1Q19. We expect consumption to be dampened at least for 1Q19, thereby limiting FY20F earnings growth. Furthermore, travel restrictions regionally would cap growth for Health and Beauty business as well.
  • We reduced our FY20F earnings by 12% with earnings growth now at 3.4%, having lowered our sales growth forecast from 5% to 3% and operating margins from 4% to 3.9%. We anticipate efficiencies like centralised procurement to bear fruit in FY21F, thus imputing better operating margins with a faster earnings growth rate of 12% y-o-y.

Maintain HOLD with a lower SOTP-based Target Price of US$5.20:

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-03-06
SGX Stock Analyst Report HOLD MAINTAIN HOLD 5.20 DOWN 7.990