DAIRY FARM INT'L HOLDINGS LTD (SGX:D01)
Dairy Farm International - Work In Progress
- Downgrade Dairy Farm to HOLD with target price cut to US$3.96.
- 1H21 underlying profit fell 69.5% y-o-y to US$32.1m.
- Grocery retail impacted by twin headwinds of demand normalisation and intense competition.
- Transformation strategy to take time to bear fruit.
Dairy Farm's 1H21 results
- Dairy Farm (SGX:D01)'s 1H21 revenue and underlying earnings declined to US$4.5bn (-13.4% y-o-y, -9.8% h-o-h) and US$32.1m (-69.5% y-o-y, -81.2% h-o-h) respectively. The lower financial performance was due to a combination of factors:
- a normalization in Grocery Retail demand post-COVID,
- pandemic restrictions denting traffic and sales of Health & Beauty and Home Furnishings segments,
- annualization of government support received in 2020, causing government grants received to being lesser by ~US$30m y-o-y in 1H21,
- divested units of Wellcome Taiwan and Rose Pharmacy not contributing to revenue,
- restructuring of Indonesian Giant brand investment resulting in ~US$30.5m charge.
Grocery Retail.
- A normalization of grocery retail demand has taken place as key markets such as Hong Kong and China lifted pandemic restrictions. Yonghui Superstores also saw lower margins as it sought to compete with online competition, resulting in Dairy Farm recording a share of loss of ~US$31m for the six months ending 31 Mar 2021. We think this normalization could continue in Dairy Farm’s key markets of Hong Kong and Singapore as pandemic restrictions are further lifted.
- In Indonesia, the surge in COVID-19 has impacted supermarket sales as consumers instead flocked to mini-market chains such as Alfamart. As such, Dairy Farm’s restructuring of Giant in Indonesia is a step in the right direction.
Convenience Stores.
- The Convenience Stores segment rebounded in 1H21 helped by a stable pandemic situation in China. Convenience Stores saw revenue and operating profit rise to US$1.1bn and US$18.7m respectively with same store sales growth encouraging especially in Southern China. However, the recent spike in COVID-19 cases in China that has spread to over 20 cities may create risks of another lockdown that could dampen sales again.
Health & Beauty and Home Furnishings.
- Low tourist arrivals to Hong Kong due to closed borders and pandemic restrictions implemented in Southeast Asia contributed to the segment’s 14.6% y-o-y decline in revenue to US$887.1m. Similarly, Home Furnishings revenue was flat y-o-y at US$384.8m as Indonesia and Taiwan (where a significant number of Dairy Farm’s IKEA stores are situated at) saw a surge in COVID-19 infections that led to implementation of pandemic restrictions.
- Going forward, we believe Health & Beauty revenue may be close to the bottom and have projected h-o-h revenue growth of 5.8%. The Home Furnishings segment could also see an improved 2H21 supported by an improved pandemic situation in Taiwan.
Bright spot: Transformation in progress as own brand SKUs rise.
- Dairy Farm’s own brand now has over 1,200 SKUs, up from over 600 as at end-2020. The Group also relaunched its own brand, Yu Pin Kang, in China. Own brand penetration has grown 40% since launch. Dairy Farm is also moving away from its Giant hypermarket brand in Indonesia to focus on IKEA, Guardian, and Hero Supermarkets.
Price investment strategy to take time to bear fruit.
- We believe the pandemic may have shifted consumption patterns in favour of value. Indeed, Dairy Farm’s price investment strategy across its business segments is underpinned by observations of “customers flight to value”. A key concern arising from price investment is that Dairy Farm may face an extended period of lower margins. We note that supermarket chains in the UK, such as Tesco and Morrisons, had to grapple with years of lower margins in their efforts to compete with discount chains such as Aldi. As such, we think the price investment strategy will take time as Dairy Farm’s cost structure undergoes changes.
- We emphasize that price investment does not mean permanently lower margins. Notably, Tesco has managed to increase its margins following its price investment strategy.
Downgrade to HOLD with a target price of US$3.96.
- We revise our earnings downwards to account for the weaker than expected performance across Dairy Farm’s segments. The share of loss of associates, especially Yonghui Superstores, also came as a surprise and accounts for a large part of our reduction in earnings as we had previously forecast profits for the associate.
- Our target price of US$3.96 for Dairy Farm is derived from a sum-of-parts valuation methodology. We value Dairy Farm's core business at US$3.47 based on DCF, its 20% and 18% stakes in Yonghui and RRHI based on market price at US$0.88 and US$0.22 respectively, before reducing by net debt at US$0.60 per share.
- A key reason for the lower Dairy Farm valuation is also that share price of Yonghui and RRHI have both been on a downtrend.
- See
Woon Bing Yong
DBS Group Research
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https://www.dbsvickers.com/
2021-08-02
SGX Stock
Analyst Report
3.96
DOWN
4.780
