SINGAPORE (May 19): CIMB has downgraded Dairy Farm International (DFI) to “hold” from “add” and lowered its price target from US$10.00 to US$6.75, cutting its projected FY16 and FY17 earnings by 13% and 20% respectively.

“We think initiatives to improve margins will only start to show in FY17,” says CIMB analyst Jonathan Seow in a Wednesday report on the operator of supermarkets, convenience stores and health and beauty shops.

FY15 marked a challenging consumer trading environment for DFI. The company reported its biggest y-o-y earnings decline of 17%, which Seow attributes to weak macro slowing topline growth and added costs from too-rapid expansion in Indonesia and Singapore.

“Demand failed to keep up, cost pressures kicked in, and there was intense competition,” he explains.  

Seow foresees further store closures in FY16 as store rationalisation costs, labour and rent is likely to pressure near-term margins. While FY16 is “likely to remain weak”, he adds that DFI is likely to benefit in the longer term from margin improvement initiatives comprising a higher range of fresh produce, increased private label offering, direct sourcing, and distribution centres.

“However, we think DFI will need to show improved earnings and margins before the stock sees a re-rating,” says Seow.

At 3:34pm, Dairy Farm International was down by 1.2% at US$6.48.