The Positives
+ Positive performances in most of the segments. Notably, operating profit from Convenience Stores and Health and Beauty divisions grew 15.5% and 19.6% YoY, respectively. Both divisions saw margin improvement of 0.4 and 0.9 percentage points, respectively, reflecting its successful store rationalization and beauty care range enhancements initiatives.
+ Strong results from its key associates. Its Associates and JVs contributed 28.2% of FY17 EBIT, compared to last year’s 20.5%. Maxim’s saw strong performances from its branded products, particularly mooncakes, and its restaurant businesses in China; while Yonghui Superstores were underpinned by net addition of 292 stores in 2017 and margin gains.
The Negatives
– Persistent weakness in the Supermarket and Hypermarket businesses, mainly in SE Asia (Southeast Asia). Notwithstanding the soft consumer sentiment in Singapore, Malaysia and Indonesia, competition in these markets intensified in terms of pricing and store format (e-commerce in Singapore and smaller format stores in Indonesia).
– Higher operating costs, gestation costs and business change costs hurt its core operating profit. FY17 recorded two huge one-offs in FY17: US$9mn pre-opening expenses from the new 4th store in Hong Kong (opened in Oct-17); and US$72.8mn of business change costs arising from the closure of underperforming stores, stock clearance and restructuring costs in the Food division in SE Asia.
Outlook
Positive outlook on brighter economic prospect. We expect recovery in SE Asia consumer sentiment as well as higher Chinese tourist arrivals to Hong Kong and Macau to gain momentum in 2018.
A new Group Chief Executive, Ian McLeod, joined the Group in 18 Sep-17. The former Coles Group’s Chief Executive, who brings with him, over 30 years of international retailing experience, and an impressive track record of resuscitating the ailing retail giant in Australia. He has initiated a strategic review since he took helm.
Maintained BUY with slightly lower TP of US$9.83 (previously US$9.89)
We trimmed our FY18e Core EBITDA by 10.6% on higher operating costs, leading to a 12.2% lower FY18e EPS of US36.4 cent. However, due to the increased market value from Yonghui, our SOTP-derived TP is broadly unchanged from US$9.89 to US$9.83.
We continue to like Dairy Farm on its:
Successful execution and materialization from its continuous growth initiatives could be re-rating catalysts
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Lin Sin has been an investment analyst in Phillip Securities Research since June 2014, where she started as an economist, focusing on China and ASEAN macroeconomics. Currently, she covers primarily the Consumers and Healthcare sectors in Singapore equities market.
She graduated with a Bachelor of Science in Mathematics and Economics from NTU.
