Asia retail giant Dairy Farm (DFI) is transforming for the better, with a multi-year plan to evolve its South Asia supermarkets, say DBS Group Research analysts Alfie Yeo and Andy Sim in an Oct 23 note. Yeo and Sim are recommending ‘buy’ on the company, with a target price of US$4.44 ($6.03).
“DFI’s transformation plan to turn around earnings is tracking well with margin improvements already seen in the supermarket business… We believe DFI’s multi-year transformation programme will eventually take shape and re-rate the stock.” note the analysts.
DFI is undergoing its multi-year transformation plan, write Yeo and Sim, which remains on track for operational improvement. “We have already seen results in margin improvement from its 1H20 earnings report. We believe this is on track to drive long-term operational efficiencies.”
The Pan-Asian retailer operates over 6,400 supermarkets, hypermarkets, health and beauty stores, convenience stores, home furnishing stores and restaurants under well-known brand names in Hong Kong, Taiwan, China, Macau, Singapore, the Philippines, Cambodia, Brunei, Malaysia, Indonesia and Vietnam.
The Jardine Matheson company announced in July that its 1H20 earnings dropped by 35% to US$115 million from US$178 million in 1H19.
See: Dairy Farm posts 35% drop in 1H earnings to US$115 mil on pandemic-related restrictions
While supermarkets were generally beneficiaries of Covid-19 lockdowns, Yeo and Sim note that DFI is also exposed to tourist-dependent markets. Hong Kong’s Health & Beauty operations are impacted by lower tourist arrivals, as key China tourists dwindled in numbers.
Health & Beauty segment across all markets contributed close to 30% of revenue in FY19. There are over 300 Mannings stores in Hong Kong vs 2,400 regionally, including more than 100 Guardian outlets in Singapore. Convenience store sales were also disappointing during the regional lockdown earlier this year.
See also: RHB sets new benchmark for Dairy Farm as HK moves into a new 'normal'
That said, the analysts expect supermarket sales to remain elevated despite moderating from the 1H20 peak. Apart from weaknesses in Health & Beauty and convenience stores, supermarket sales performed well and remain at elevated levels both in Hong Kong and Singapore, note Yeo and Sim.
“In Singapore, we expect gradual easing of circuit breaker measures. This should keep levels of socialising and entertainment subdued as a good number of consumers continue to cook at home. These should keep supermarket sales robust on a y-o-y basis, even though sales are easing from the peak in 1H20,” say the analysts.
In China, Yeo and Sim expect DFI’s Chinese brand Yonghui’s 3Q20 y-o-y sales growth to moderate to 12% (1H20: +23%), with same-store sales growth (SSSG) potentially running into a negative low single-digit rate.
This is due to flood problems across various regions including Chongqing, Sichuan, Anhui, Zhejiang, since June, which affected some of its store operations including logistics for online deliveries, and the improving Covid-19 situation in China that has led to more out-of-home dining.
The DBS analysts revised FY20- 21F earnings forecasts for Yonghui earlier this month after lowering our sales and earnings estimates due to a weaker-than-expected 3Q20 and wider losses from online associate Yonghui Yunchuang Technology Co Ltd, which had incurred core losses of approximately RMB500 million ($101.64 million) in 1H20.
Consequently, they are lowering FY20-22F earnings forecasts for DFI by up to 6%.
“Nonetheless, we expect 4Q20 to resume a better momentum along with new store sales contribution, normalising traffic in physical stores, and the payoff of online sales promotional efforts,” say Yeo and Sim.
As at 11.38am, shares in Dairy Farm are trading at 2 US cents higher, or 0.53% up, at US$3.78, while shares in Jardine Matheson Holdings Limited are trading at US$1.16 higher, or 2.64% up, at US$45.16.
