SINGAPORE (Oct 8): Dairy Farm will find it difficult to show decent improvement in its food division margins in 2H18 given flattish growth in the supermarket industry, rising rental rates in Hong Kong as well as store closures in Singapore, according to RHB Research.
An unofficial Facebook post suggested that seven Giant supermarket outlets in Singapore could be closed, reported RHB.
Of these, two at Junction 10 and Jalan Tenteram have already been closed while the Vivocity outlet is officially slated to shutter early next year.
“Management did not confirm the accuracy of the post, but stated that the group is reviewing the viability of three other outlets,” says Juliana Cai in a Monday report.
Although the closure of underperforming stores is good for the company in the long term, Cai says 2H18 margins could be hit by the clearance of stocks for the closing stores.
‘Year to date, sales figures at existing stores are also not likely to pick up substantially to cover the shortfall, as the supermarket industry has been flattish in Singapore while competitors like Sheng Siong and NTUC Fair Price, gain market share by taking over Giant’s exited premises,” she adds.
Cai also does not expect a strong pick-up in performance in Malaysia too as Malaysia Retailers Association also expects the supermarket industry to remain soft.
In Hongkong, the group’s larger-format stores saw an uptrend in rental rates in 1H18 and since July and August supermarket sales were flattish, profit conversion should slow down, moving forward.
Moreover, Dairy Farm’s 1H18 results were largely held up by its strong performance in the health & beauty segment, particularly in Hong Kong and Macau. However, as the RMB depreciated by 5% against the HKD since the start of the year, Cai thinks the growth in tourist spending may taper off. As a result, y-o-y growth in its health & beauty segment could also decelerate.
RHB is maintaining its “neutral” with an unchanged target price of US$9.60.
“For Singapore-listed retailers, we still prefer Sheng Siong, which is likely to benefit from Giant store closures. Sheng Siong currently trades at a discount to Dairy Farm, at 20x FY19F P/E,” says Cai.
Shares in Dairy Farm last traded at US$9.18 or 21.5 times FY20 earnings.
