DAIRY FARM INT'L HOLDINGS LTD (SGX:D01)
Dairy Farm - Headwinds From High Exposure To North Asia
- Stay NEUTRAL with a new USD5.05 Target Price from USD6.63, 6% upside plus 4% yield.
- Dairy Farm (SGX:D01)'s FY19 results were below expectations while full-year PATMI of USD326m met 92% of our estimate. Social unrest in Hong Kong during 2H19 impacted sales growth and profitability for the health & beauty unit, as well as Dairy Farm’s associate – Maxim’s.
- Looking ahead, we think the headwinds remain, as the outbreak of COVID-19 should continue to put downward pressure on these two businesses’ sales.
Headwinds on health & beauty and Maxim’s.
- Management expects the ongoing COVID-19 outbreak to impact FY20F results materially. In particular, we expect the health & beauty division to likely see most of the negative impact. We believe a substantial proportion of Hong Kong sales is dependent on Mainland Chinese tourist spending. The outbreak should affect tourism activities till 1H20.
- Additionally, its Maxim’s associate is in the foodservice retail business and is also likely to be negatively impacted, as consumers avoid gatherings and dining out during this outbreak.
Improvements in grocery retail underway.
- Dairy Farm saw operating profit for the supermarket division surge > 100% y-o-y to USD63m (2018: USD22m) on improved profitability of its South-East Asian business. However, we note this was partially due to a shift of costs from this unit to headquarters, as Dairy Farm centralised its procurement and integrated its supply chain.
- Centralised SG&A expenditure rose to USD143m from USD103m. Nonetheless, we see this as a positive move, as we expect the SG&A increase to decelerate on increased centralisation. Sales for this segment should remain resilient against the virus outbreak.
Expect IKEA to still see gestation costs in FY20.
- Sales from IKEA grew 6% y-o-y on two new store openings in Taiwan and Indonesia. However, operating profits declined, as the new stores are in their gestation phase. Dairy Farm expects more stores to open in Taiwan and Macau in 2020. As such, we do not expect operating profit to recover significantly due to these new start-up costs.
Change in target price and earnings.
- The challenging operating environment is likely to slow down the turnaround process for Dairy Farm. We cut our FY20F-21F earnings by 25% and 20% amidst declining profitability in key segments. This lowers our DCF-derived Target Price to USD5.05.
- See Dairy Farm Share Price; Dairy Farm Target Price; Dairy Farm Analyst Reports; Dairy Farm Dividend History; Dairy Farm Announcements; Dairy Farm Latest News.
- Key downside risk: A prolonged COVID-19 outbreak or epidemic escalation in South-East Asian countries may lead to further declines in consumer sentiment and earnings.
- Upside risk: Faster-than-expected recovery in consumer spending.
Juliana Cai
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-03-06
SGX Stock
Analyst Report
5.05
DOWN
6.630
