Analysts have mixed sentiments on supermarket and convenience store operator Dairy Farm as the company on July 29 recorded that 1H20 earnings have dropped by 35% to US$115 million ($158.3 million) from US$178 million in 1H19.

Stripping off the one-offs, underlying earnings for 1H20 was US$105 million, 40% lower than US$177 million in 1H19.

Revenue for the first half of the financial year came in at US$5.2 billion, 9% lower than US$5.8 billion in the previous year.

Dairy Farm also declared an interim dividend of 5 US cents per share, lower than 6.5 US cents per share declared in the same period a year ago.

See: Dairy Farm posts 35% drop in 1H earnings to US$115 mil on pandemic-related restrictions

RHB Group Research is keeping “neutral” on Dairy Farm with a new target price of US$4.47 from US$4.95 previously.

In its July 30 report, analyst Juliana Cai says that the 1H20 results were below expectations. While the grocery segment saw a strong turnaround, Covid-19’s negative impact on health & beauty (H&B), convenience stores, and Maxim’s was greater-than-expected.

“Our call is retained, as a large part of our FY21-22 earnings recovery expectations hinge on the relaxation of social distancing measures and border controls, which remain to be seen,” Cai adds.

Dairy Farm’s grocery segment was a key Covid-19 beneficiary as lockdowns in various countries in 1H20 resulted in higher demand for food at home, while its associate Yonghui also saw a similar trend of strong sales and earnings growth in 1Q20 when China had its extensive lockdown.

On the other hand, IKEA saw a strong 31% y-o-y EBIT growth from a 5% y-o-y growth in sales. This was largely due to its ecommerce platform expansion and new store openings.

However, this was not enough to offset the loss from Dairy Farm’s H&B, as well as convenience stores and Maxim’s restaurants, which were heavily impacted by social distancing measures and the decline in tourist spending. The impact on margins were greater-than-expected, due to major operational deleverage.

Overall, Cai’s outlook for Dairy Farm remains cloudy.

CGS-CIMB Research shares similar sentiments as it continues to rate Dairy Farm a “hold” with a decreased target price of US$4.63 from US$5.45.

Analyst Cezzane See in a July 30 report also believes that the better entry point to the stock is closer to about US$3.80.

Meanwhile, the cut in interim dividend to 5 US cents was below the analyst’s expectations.

Dairy Farm is also expecting trading conditions in 2H20 to continue to be challenging.

“While most of its major markets have loosened movement controls since July, we believe improvements in the three weaker segments (convenience stores, health and beauty, Maxim’s) could be capped given Hong Kong’s recently tightened lockdowns in July,” says See, who has cut FY20-22 EPS forecasts by 9.9-16.7% and trim DPS forecasts to 16 US cents for FY20.

On the other hand, DBS Group Research is upbeat on Dairy Farm as it reiterates it “buy” call on the stock with the belief that its multi-year transformation programme will eventually take shape and re-rate the stock. However, the target price has been lowered to US$4.86 from US$5.10.

Analysts Alfie Yeo and Andy Sim say, “We maintain our Buy rating on Dairy Farm on attractive valuation and that its ongoing transformation remains well on track. Despite cutting FY20 earnings by 16% due to Covid-19, forward PE valuations remain attractive, at near -2 SD of its four-year historical forward mean PE.”

The analysts expect more efficiency benefits to come from ongoing management initiatives that will put DFI on track for earnings improvement and re-rating over the long term.

Covid-19 had presented challenges for Dairy Farm in 1H20, dragging earnings outlook for FY20 which led to a cut in interim dividend.

“Nonetheless, after factoring in the weak 1H20 earnings, DFI remains undervalued with core business (ex Yonghui and Robinson’s Retail Holdings) trading at under 10 times forward PE. Despite lowering our dividend assumptions, dividend yield remains attractive at >4%,” says the analysts.

As at 1.00pm, shares in Dairy Farm are trading 2.2% higher at US$4.24 or 4.7 times FY20 book with a dividend yield of 4.1%.