• Downgrade to NEUTRAL, from Buy with new USD9.60 Target Price from SGD9.66, offering 5% upside.
• Strong results from health & beauty business were diluted by losses from South-East Asia supermarket segment and weak Yonghui performance. We expect to see continued high opex in the next 12-24 months, as Dairy Farm rejigs supermarkets and invests in IT infrastructure.
• Potential headwinds in 2H18 include rising rental rates and depreciation of ASEAN currencies against USD.
• Switch to Sheng Siong (SGX:OV8; Rating: BUY; Target Price: SGD1.27) for stable earnings growth via store count and margin expansion.

Downgrade to NEUTRAL

Dairy Farm has a 5-year transformation plan to eventually improve market proposition, supply chain competence and omni- channel capabilities. While we are positive on long-term prospects, we expect to see opex remaining high over the next 12-24 months, as it restructures and invest in stores and IT infrastructure.

Associate Yonghui Superstores should also to chart slower growth, as it invests in new digitised offline format – Chaoji Wuzhong, leading to start-up losses in the current gestation phase. Consensus cut Yonghui’s earnings by 4-8% over FY18F-20F in the past month. As such, we cut FY18F-20F EPS by 6-14% to reflect higher costs in the supermarket division and slower growth from Yonghui.

We now expect EPS to grow at 7% CAGR over the next three years. This reduces our DCF-derived Target Price to USD9.60.

Prefer Sheng Siong

Prefer Sheng Siong for Singapore-listed consumer stock, which trades at 19x FY19F P/E, a discount to Dairy Farm. We think it offers a defensive investment since almost all of its income is derived from Singapore. 

We expect earnings growth to be stable at 10% CAGR over the next three years, driven by new store openings (six new stores YTD) and margin expansion.

Source: RHB Invest Research - 30 Jul 2018