Bumpy road to recovery
? FY21 core NP of US$105m (-62% yoy) was in line with our expectations but below consensus. Core operating profit improved yoy, but Yonghui dragged.
? Worsening wave of Covid-19 infections in HK delayed recovery expectations, with reopening of the HK-Mainland China border pushed back further.
? Price investment campaigns, e-commerce initiatives could also slow margin improvements. Maintain Hold with a lower TP of US$2.90.
2H21: Core operations improved, Yonghui remains a big drag
Dairy Farm (DFI) reported a 2H21 core net profit of US$72.5m (+120% hoh, -55% yoy), bringing FY21 core net profit to US$104.6m (-62% yoy), in line with our expectations but some 14% below Bloomberg consensus. Key drag for the year was the higher losses from associate Yonghui. DFI’s subsidiaries showed sequential improvements in operating profit (excl. govt grants) in 2H21 to US$135m (1H21: US$125m; 2H20: US$58.2m).
HK’s Covid-19 woes delay recovery
The worsening fifth wave of Covid-19 infections which led to tightened alerts in Hong Kong since Jan 2022 have delayed recovery expectations for DFI – we were hoping for the HK-Mainland China border to open progressively from 1H22F and the return of Chinese tourists to help aid earnings recovery for DFI’s Health and Beauty (H&B) segment (biggest earnings contributor for DFI pre-Covid). While the latest round of tightened restrictions has helped to boost footfall for DFI’s HK supermarkets and pharmacies, it has negatively impacted its convenience stores and restaurants. Operational challenges have also increased significantly, given a stretched supply chain, manpower shortages and elevated Covid-19-related costs.
Reinvesting business transformation gains for longer-term growth
DFI remains committed to reinvesting efficiency gains from its business transformation initiatives into price investment campaigns to boost brand competitiveness. The goal is to improve value proposition for customers, in turn driving volumes, which would eventually translate into profit growth. This, along with additional investments into DFI’s e-commerce pilots across key markets (yuu-to-me in Hong Kong, Cart in Singapore), could mean a slower pace of margin recovery ahead, even as the situation in HK improves.
Maintain Hold with a lower TP of US$2.90
Maintain Hold. We cut our core EPS forecasts for FY22-23F by 24.2-27.5% on the back of the slower pace of sales recovery for Health & Beauty segment, lower margin assumptions and higher Yonghui losses. Our TP is lowered to US$2.90 as we roll over our valuation base year, and lower our target multiple to 16.0x CY23F P/E (2 s.d. below DFI’s 5-year historical mean) from 18.5x in view of the challenging operating
environment. Upside risks include more clarity on HK-China border reopening plans, or stronger sales recovery driven by store productivity gains. Downside risks include higher than expected losses on e-commerce venture.