• Dairy Farm International's 1H21 underlying profit of US$32.1m (-81% h-o-h, -69% y-o-y) disappointed. Key drags were
  1. lower government grants, and
  2. weaker associate earnings.
• Dairy Farm International's 2H21F likely to remain challenging with
  1. lack of Chinese tourist arrivals in HK, and
  2. ongoing Covid-related movement restrictions in Southeast Asia.
• We lower expectations on pace of margin recovery as Dairy Farm International undertakes more price investment campaigns. Downgrade Dairy Farm International to HOLD and lower target price to US$4.00.

Dairy Farm International Reported Weak 1H21 Performance

• Dairy Farm International (SGX:D01)’s 1H21 underlying profit of US$32.1m (-81% h-o-h, -69% y-o-y) disappointed at 11%/10% of our/consensus FY21F. Key surprise was weaker than expected topline (- 13% y-o-y), as Dairy Farm International remains significantly affected by the ongoing pandemic. Convenience store segment was the exception with revenue growth on a y-o-y basis while other key segments saw declines.
• Operating deleverage and lower government grants caused lower underlying operating profit of US$155m (-27% y-o-y). Dairy Farm International was also hurt by weaker contribution from associates and joint ventures (US$43.6m loss in 1H21 vs US$4.4m profit in 1H20).
• An interim dividend of US$0.03 per share (-40% y-o-y) was declared.

Transformation Taking Shape, But Earnings Recovery Will Take Time

• 2H21F should remain challenging; we forecast Dairy Farm International’s core net profit to fall 8% y-o-y.
• Health and Beauty cut Dairy Farm International's FY21-23F earnings per share forecasts by 0.6-36.0%.

Home Furnishing Segment a Focus in FY21/22F

• Dairy Farm announced in May 21 that it will be exiting its Giant banner in Indonesia productivity and margin of this segment.

Downgrade Dairy Farm HOLD With a Lower Target Price of US$4.00

• We downgrade Dairy Farm International from Add to HOLD, in view of the near-term challenging 22x previously.

• We will turn more positive on
  1. HK-China border reopening allowing quarantine-free travel, or
  2. stronger margin expansion.
• Downside risks: slow resolution of COVID-19, intensifying competition from e-commerce.

Source: CGS-CIMB Research - 30 Jul 2021