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Dairy Farm International Holdings – Headwinds To Persist
Corporate Digest | 19 November 2015
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By: Joey Ho
Articles (30) Profile

Dairy Farm International Holdings (Dairy Farm) saw its shares plunge 35.6 percent over the past year to US$6.06 as of 12 Nov 2015 from US$9.41 a year ago. During the same period, the Straits Times Index slipped 9.8 percent and fell 16.6 percent from its 52 week high to 2,961 points as of 12 Nov 2015.

The Business
Dairy Farm, a leading pan-Asian retailer, together with associates and joint ventures operate 6,400 outlets which comprise of supermarkets, hypermarkets, convenience stores, health and beauty stores and home furnishing stores.  The group operates under a range of well-known brands such as Wellcome, Cold Storage, Giant, 7-Eleven, Guardian, GNC and Ikea.

Challenges Expected To Continue
While sales have been positive across most business segments, the group faced margin pressures in the food business and was further impacted by adverse exchange rate conditions. Growth in the North Asia food business slowed down amid the current economic conditions, with Hong Kong’s latest data for September 2015 showing a significant slowdown for supermarkets/supermarket section of department stores. The index grew 5.2 percent year-on-year for 2014, slowed down in early 2015 and is currently up only 1.1 percent year-on-year for the whole of year-to-date 2015. In 2014, the North Asia region made up 54.3 percent and 73 percent of Dairy Farm’s revenue and operating profit respectively. We estimate that Hong Kong is the major contributor of the North Asia region and with little signs of recovery, the group’s key markets in 2016 remains challenging.

In Singapore, Giant and Cold Storage supermarkets are facing increased competition and significant pricing pressures from Fairprice and Sheng Siong. The group’s 7-Eleven stores, which mostly operate 24 hours and benefit from late night alcohol sales, have been severely hit by the recently introduced regulations restricting late night alcohol sales. The group recently established an on-line platform for Guardian Singapore, which is the first of several planned new moves into e-commerce. However, the effectiveness of this move remains uncertain as earlier players into the e-commerce field, such as Watsons, would have secured much of the market share.

In Malaysia, the introduction of goods and services tax and softer consumer confidence have dampened retail spending. In addition, the weaker Malaysian Ringgit would affect the overall performance on translation into US dollars. In 2014, the East Asia region comprising Malaysia, Indonesia, Vietnam and Brunei, made up 26.3 percent and 13.9 percent of revenue and operating profit respectively. Over the past year, the Malaysian Ringgit has hit the lowest level against the US dollar since 1998, similarly the Indonesian Rupiah has been in a downward spiral against the US dollar. In view of the weakening ASEAN currencies showing no signs of recovery, Dairy Farm’s performance is likely to be impacted further.  These challenges are expected to persist into FY16 and the group currently has not released plans to address the issues.

Potential Growth Catalyst
We have identified two key growth factors which are the group’s acquisition of Macau-based San Miu Supermarket chain in March, as well as the purchase of a 19.99 percent interest in Yonghui Superstores in April. While there have been positive contributions from both investments, as shown by a US$10.1 million increase in Share of results of associates and joint ventures for 1H15, it is unlikely that these two factors will be able to offset the weaker performance in the South East Asia regions.

San Miu Supermarket – Operates 15 mass-market supermarkets with an average gross store size of 9,500 square feet. The acquisition complements Dairy Farm’s well-established convenience store and health and beauty businesses in the territory. It is likely that the group intends to include more Manning stores in the supermarkets in order to improve efficiency and increase cost savings.

Yonghui Superstores – Operates 351 retail outlets across 17 provinces in China. Dairy Farm will invest an additional US$210 million to retain its 20 percent stake while Inc, China’s second-largest e-commerce site by sales, will invest about US$700 million in Yonghui’s recent private placement of 6.5 billion yuan. The co-operation with is expected to accelerate Yonghui’s participation in the rapidly expanding e-commerce space in China.

Dairy Farm’s health and beauty stores in Hong Kong are expected to maintain its performance in the near-term despite the slowdown in tourist arrivals from China. Although the progress has been slow, Mannings’ progress into China by establishing stores in Yonghui’s supermarkets remains the key driver for growth.

Potential Risks
Currency Translation – A diversified portfolio with significant exposure to foreign exchange risks will be severely impacted by weakness in regional currencies, translating to lower profits even if performance in local currencies improves. Dairy Farm’s Indonesian and Malaysian unit are key risks factors, as the currencies have experienced huge fluctuations against the US dollar over the past five years.

Thinning Margins – With operations spread across several countries, it is exposed to regulatory changes in each of these markets. The group has suffered from policy changes such as the restriction on foreign labour and restriction on late night alcohol sales in Singapore, as well as the mandatory minimum wage in Indonesia. Such regulations which thin the group’s margins pose a potential threat, especially in less developed countries where regulations have much room for review.

While we can expect revenue to register a positive growth and higher share of results of associates and joint ventures for FY15, the group is likely to report a decline in net profit amid the margin pressures.

Based on the latest full year earnings per share, Dairy Farm’s shares traded between a price to earnings (PE) ratio of 15.8 times and 25.9 times over the past year, and currently trades slightly above the 52 week low at a PE of 16.1 times (price as of 12 Nov 2015). Companies in the supermarket industry such as Sheng Siong tend to trade at a PE of above 20 times. Should Dairy Farm’s shares recover to trade at a PE of 20 times, there would be an upside of about 24.2 percent.

Equipped with a bachelor in banking and finance, Joey covers the finance, technology and healthcare industry in Singapore.

Please click here for more information about this author.

Dairy Farm Int'l Hldgs  7.030 +0.04 +0.57%   
Business: Asian retail co that operates supermarkets, convenience stores & others. [FY18 Turnover] Food (70.3%), health & beauty (14.6%), restaurants (11.8%), home furnishings (3.3%).

Insight: Feb-19, FY18 net profit plunged 77% to US$92m due ... Read More

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