SINGAPORE (March 3): CIMB Research is keeping Dairy Farm International Holdings at “add” and increasing its target price to US$9.18, from US$8.70 previously.
This comes after DFI on Thursday posted a strong set of earnings results that beat analysts’ expectations.
DFI saw full-year earnings increase 10.5% to US$469.0 million ($660 million), on the back of improved operating margins by its food division and at IKEA, as well as strong contributions from Maxim’s and Yonghui.
(See: Dairy Farm full-year earnings up 11% to US$469 mil)
“Overall, we are positive on the stock’s margin recovery initiatives that have flowed through the numbers earlier than expected,” says CIMB analyst Jonathan Seow in a Friday report. “We are now confident that DFI has truly turned the corner.”
Seow believes that the management’s focus on rationalising stores and driving productivity were reflected in its FY16 results.
“Sales were flat, reflecting in part the group’s store rationalisation efforts,” Seow says. “We think the stock could re-rate higher if sales recover.”
However, Seow points out that DFI’s initiatives to improve gross margins and control operating costs are now paying dividends.
As a result, CIMB is raising its EPS forecasts on higher margin assumptions. FY17F and FY18F EPS have been increased by 8% and 5%, respectively.
Meanwhile, DFI’s home furnishings division continues to do well across all the countries it has a presence in.
“Home furnishings again achieved record sales and operating profit in FY16, and are becoming increasingly more important to the group,” says Seow.
The analyst adds that he is positive on DFI’s expansion plans to open a second Indonesian store and another store in Hong Kong in the second half of 2017.
Seow, however, cautions that DFI’s health and beauty division is “still a laggard”.
“We think downside could come from the health and beauty segment, although the segment’s 2H performance also offers hope,” he says.
“Problem areas that management will need to mitigate or turn around include soft mainland arrivals in Hong Kong, higher costs from rental increases in Hong Kong and Singapore, and competition in Malaysia,” Seow adds.
As at 3.44pm, shares of Dairy Farm International closed 1 US cent higher at US$8.45.
