SINGAPORE (June 16): RHB is maintaining its “buy” rating on Dairy Farm with a target price of US$10 ($13.84) given the recent correction of its share price.
In 1Q, sales and operating profit of its South East Asia Food division declined partly due to the store rationalisation in Singapore and Indonesia last year.
But RHB says the margin expansion story of the Supermarkets division remains intact while sales in its Health & Beauty and Home Furnishings divisions are picking up.
“We believe these factors together with the margin improvement from the Supermarkets division would help to support Dairy Farm’s financial performance in the medium term,” says analyst Juliana Cai.
According to Dairy Farm’s 1Q17 interim statement, the Health & Beauty segment demonstrated better y-o-y sales and operating profit for the quarter.
In a Friday report, Cai says she expects performance of the segment to continue to pick up for the rest of the year on higher Chinese tourist arrivals in Hong Kong; potential rental reduction in Hong Kong; improved corporate brands penetration and margin improvement after the rationalisation of non-performing Indonesian outlets in 2016.
For the Home Furnishings segment, IKEA leads the industry with three outlets in Hong Kong and five outlets in Taiwan while its only outlet in Indonesia is seeing strong traction and sales growth.
Over the last year, Dairy Farm has established e-commerce websites for all three regions and opened three pick-up points. It is also planning to open two new stores in Hong Kong and Indonesia this year.
“We believe the increased accessibility would boost sales for its Home Furnishings division moving forward,” says Cai.
In the medium term, Cai says upside still lies in margin expansion from its Supermarkets segment.
Last year, a new fresh food distribution centre (DC) opened in Singapore. This year, Dairy Farm is likely to open one in the Philippines and another in Malaysia.
This would raise fresh food penetration in Dairy Farm’s supermarkets and hypermarkets and give margins an uplift.
Shares of Dairy Farm are up 11 cents at US$8.15.
