Dairy Farm International - UOB Kay Hian 2021-08-02: 1H21 A Poor Set Of Results; Down But Not Out


Dairy Farm International - 1H21 A Poor Set Of Results; Down But Not Out

  • Dairy Farm reported a weak set of 1H21 numbers with net profit declining 85% y-o-y to US$17m largely due to restructuring costs, difficult trading conditions and a normalisation of spending patterns post the COVID-19 spike in 1H20. Grocery and health & beauty revenues were weaker y-o-y while convenience stores were the key highlight of the result.
  • Maintain BUY on Dairy Farm with a lower target price of US$4.53 (previously US$5.19).

Dairy Farm Intenrational's 1H21 results were below expectations.

  • Dairy Farm International (SGX:D01) reported a 1H21 revenue decline of 13% y-o-y to US$4.5b while NPAT attributable to shareholders slumped 85% y-o-y to US$17m. Underlying operating profit fell 27% y-o-y to US$155m with the grocery business the worst affected as more normal purchasing patterns took hold post the initial COVID-19 panic spending.
  • A US$0.03 dividend was declared (1H20: US$0.05) which was below expectations.
  • More than a few issues affected the bottom-line. These include:
    1. US$30m in restructuring costs in Indonesia,
    2. lower government grants and rental rebates in 1H21 vs the year-ago period,
    3. difficult trading conditions in F&B for its associate Maxims in Thailand and Singapore, and
    4. normalisation of spending patterns in grocery business in 1H21 vs a high base in 1H20.
  • In addition, there were higher costs associated with COVID-19, such as increased usage of PPE, more intensive levels of cleaning/sanitising and temporary accommodation.
  • Grocery saw the largest y-o-y sales decline, down 22% in 1H21. Management continues to press ahead with its transformation plan and stated during the earnings call that its like-for-like (LFL) sales across all markets has seen strong growth on two-year basis, adjusting for 2020’s blip in panic buying. It added that it remains focused on dollar margin rather than percentage profit margin, and also aims to drive stronger footfall and bigger basket size at its properties. Without meaningful guidance on restructuring costs, we have factored in US$10m p.a.. Note that in 1H21, the company incurred US$32m in such costs vs US$0.3m in 1H20.
  • Health & beauty sales fell 15% y-o-y due mainly to the lack of tourist traffic in Hong Kong given its border closure with China; at its peak, there were 2.5m daily visitors in Hong Kong vs the current 4,000. Interestingly, Dairy Farm noted that its sales of health products has increased while beauty sales declined as overall discretionary spending has fallen, which Dairy Farm attributed to customers reducing spending on non-necessities. Dairy Farm has tried to remain price competitive, and expects a more balanced mix of health and beauty spending as economic conditions improve.
  • Convenience the sole bright spot with a 7% y-o-y growth in sales. 7-11 has seen improving LFL sales trends. Importantly, the company continues to expand its stores. In 1H21, its 1,000th store opened in Hong Kong plus a further 90 stores in Guangdong (~1,450 in total). Dairy Farm stated that China’s 7-11 business has seen a strong y-o-y profit recovery, and it is looking to introduce more own-brand products as well as ready-to-eat meals to drive margins higher.
  • Ikea impacted by store closures in 1H21 but this was largely offset by e-commerce growth, which led to a 1% y-o-y decline in sales. This segment should see volume growth in the medium term as more stores are opened in Indonesia.
  • We are surprised by management electing not to issue a profit warning to the market.

Downgrading earnings estimates for Dairy Farm

  • We have lowered our earnings estimates for 2021-23 by 9-40% with the majority of the impact coming in 2021 due to the prolonged negative impact from COVID-19. Our prior assumption of zero revenue growth for both grocery and health & beauty segments in 2021 was clearly overly bullish and we have now factored in a 10% and 7% y-o-y decline respectively. Our assumption for 3% y-o-y revenue growth for convenience stores in 2021 and no growth for home furnishings remains intact.

Maintain BUY on Dairy Farm with lower target price

  • Maintain BUY with a lower PE-based target price of US$4.53 (previously US$5.19). We have rolled forward our valuation year to 2022 and at the same time peg our 2022 EPS estimate to a target multiple of 24.7x which is 1 standard deviation below its 5-year average P/E of 30.6x. We had previously used a mean P/E as we had expected a better-than-expected normalisation of post-pandemic economic conditions.
  • See
  • We believe that the discount to its average P/E is fair and reasonable given the continued COVID-19-related challenges that the company faces in its various business segments and geographies. As the region progresses towards having a greater proportion of its population vaccinated, and further evidence of its business transformation surfaces, we should expect Dairy Farm to trade at higher multiples. One of the positive takeaways from the result was the company’s continued investment in e-commerce which has started to reap rewards.

Share Price Catalysts:

  • Relaxation of lockdowns in Malaysia and Thailand
  • Increased vaccination rates across Asia leading to more stable economic conditions

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-08-02
SGX Stock Analyst Report BUY MAINTAIN BUY 4.53 DOWN 5.190