Dairy Farm International - DBS Research 2020-04-29: Transformation Intact


Dairy Farm International - Transformation Intact

  • Weak performance for Health & Beauty and Convenience Stores anticipated for 1Q20.
  • Dairy Farm's FY20-21F earnings lowered by 18-19% to reflect the weakness in those segments.
  • Transformation on track for South East Asian Supermarkets despite near term headwinds.
  • Valuation attractive at -0.5 SD of historical mean, > 4% dividend yield; maintain BUY on a lower Target Price of US$5.10.

Strong supermarket sales offset by weak Health & Beauty and Convenience Store segments, IKEA positive in 1Q20

1Q20 to be dragged by weaker segments:

  • Dairy Farm (SGX:D01) issued a business update for 1Q20 that points to overall performance affected by deterioration of North Asia Health & Beauty, Maxim’s and the Convenience store segments. We believe 1Q20 earnings would be lower y-o-y.

Poor performance from Health & Beauty and Convenience Store segments.

  • Health & Beauty and Convenience Store performance in North Asia has been particularly weak due to consumers staying home. The lack of tourists travelling to Hong Kong has affected North Asia’s Health & Beauty segment, while the convenience store segment was hit by lower footfall across China, Hong Kong, and Singapore.

IKEA was more positive.

  • Sales and margins of the IKEA Home Furnishing segment were higher, lifted by new stores which were absent last year and e-commerce growth, and lower costs especially startup costs recorded last year.

Strong Supermarket/Hypermarket performance in South East Asia.

  • The Supermarket/Hypermarket segment saw strong Same Store Sales Growth (SSSG) largely due to people staying home. Transformation plans are ongoing and performances of its South East Asian stores continue to improve.

Cut FY20-21F earnings by 18-19% to reflect 1Q20 weakness

Net reduction of sales and profit projection led by revenue cuts to Convenience stores and Health & Beauty Segments.

  • In response to the update, we are lowering our earnings estimates to reflect a weaker outlook for both the Health & Beauty and Convenience store businesses as sales momentum is expected to be slower than previously anticipated. We now assume that sales in the Convenience Stores and Health & Beauty segments will each fall by close to 30% y-o-y.

Operating profit for both segments in aggregate is projected to fall by 12% to US$419m.

  • We expect overall margins to remain stable as we factor in better margins for Home Furnishing and Supermarket/Hypermarkets business, offset by lower contribution from the higher margin Health & Beauty segment. For IKEA stores, there would be absence of start-up losses going forward and hence we are reflecting better margins for the Home Furnishing segment.

Valuations attractive despite earnings cut, reiterate BUY

Valuations attractive even after earnings cut.

  • Dairy Farm remains a multi-bagger re-rating play on its transformation strategy. Earnings may be derailed by the COVID-19 outbreak in the current quarter, but positives in the transformation process continue to come through in key areas such as South East Asia supermarkets showing improving operational efficiency.
  • Having factored in the weak outlook as highlighted in its 1Q20 update, the stock trades at 21.4x/19.0x FY20/21F PE or -0.5 SD of its long-term average forward PE and is way below peer average of 24x, and offers 4.4% dividend. In view of the multi-year transformation plan coming through eventually, we maintain our positive stance on the stock.

Maintain BUY, SOTP-based Target Price lowered to US$5.10.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-04-29
SGX Stock Analyst Report BUY MAINTAIN BUY 5.10 DOWN 5.590