Dairy Farm International - DBS Research 2020-07-30: Transformation Taking Shape

DAIRY FARM INT'L HOLDINGS LTD (SGX:D01)

Dairy Farm International - Transformation Taking Shape

Dairy Farm's 1H20 earnings below expectations as associate Maxim’s contribution disappoints.
Interim DPS of 5 UScts was below expectations.
Cut FY20F earnings by 16%.
Maintain BUY with lower Target Price of US$4.86.

Dairy Farm (SGX:D01)'s 1H20 earnings of US$115m (-35.2% y-o-y) was below expectations. Although we had factored in most of the earnings decline due to COVID-19, the earnings disappointment was largely due to lower than expected contribution from Maxim’s at the Associate/JV level.
Interim dividend declared was 5 UScts, lower than 6.5 UScts last year and below expectations. See Dairy Farm Dividend History.

Revenue declined by 9% y-o-y to US$5.24b. The lower revenue was driven by weaker Health & Beauty sales (-36% y-o-y, US$1.038b), affected by lower tourists to Hong Kong and social distancing measures in Southeast Asia.
Convenience stores was the other drag on revenue (-7% y-o-y, US$1b) led by temporary store closures in China, and lower footfall in Hong Kong and Singapore during lockdown.

Grocery Retail segment enjoyed strong sales traction in 1H20 as consumers stayed home. Sales grew 5% y-o-y to US$2.8b. More encouraging was the marked operating margin improvement to 5.3% from 1% last year. Transformation programmes including space optimisation, assortment, fresh selection, Giant store remodeling, group procurement, new upscale formats helped to drive efficiency and strong turnaround momentum especially in Singapore and Malaysia.

IKEA sales grew 5% y-o-y to US$389m, led by strong e-commerce sales and contribution from new stores. Operating profit margin improved from 5.2% to 6.4% due to sales mix and lower COGS.

Maxim’s was the cause of earnings disappointment, with losses for Restaurants at US$25m vs US$36.5m profit last year. Associates/JV income slumped by 79% y-o-y as a result. While negligible, there was a slight growth from Health & Beauty Associates/JVs and Yonghui, with a slight decline in Robinson’s Retail Holdings contribution.

Dairy Farm is on course for turnaround, with store level initiatives showing improvement in 1H20. Better operating efficiency can be expected through management’s strategic priorities which includes continued expansion of 7-Eleven stores and Mannings in South China, the new “Yuu” loyalty programme to drive customer engagement, targeting higher sales from its Medows house brand, expanding IKEA, upscaling premium grocery retail formats, growing e-commerce, and driving value at Mannings.

While core revenue and operating profit were largely in line, Maxim’s disappointment has led us to lower our FY20F earnings by 16%. Post lockdown regionally, we expect a sequential improvement in both footfall, revenue and earnings in 2H20. Imputing some recovery in FY21F, we project gradual revenue growth with margin improvement led by its transformation programme in the Grocery Retail segment.

Our SOTP-based Target Price is reduced to US$4.86, in line with our earnings cut. We continue to like the stock for its attractive valuation at near - 2SD of its four-year historical forward mean PE, with transformation plan yielding fruit, having observed operating margin improvement in its Grocery Retail segment for 1H20.
We expect more efficiency benefits to come from ongoing management initiatives that will put Dairy Farm on track for earnings improvement and re-rating over the long term.
See Dairy Farm Share Price; Dairy Farm Target Price; Dairy Farm Analyst Reports; Dairy Farm Dividend History; Dairy Farm Announcements; Dairy Farm Latest News.

Alfie YEO DBS Group Research | Andy SIM DBS Research | https://www.dbsvickers.com/ 2020-07-30

SGX Stock Analyst Report BUY MAINTAIN BUY 4.86 DOWN 5.100