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Tough operating environment to persist in 4QFY21 for Dairy Farm: CGS-CIMB

Felicia Tan
Felicia Tan11/18/2021 01:23 PM GMT+08  • 3 min read
Tough operating environment to persist in 4QFY21 for Dairy Farm: CGS-CIMB
CGS-CIMB has also maintained "hold" on DFI.
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CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan have maintained “hold” on Dairy Farm International (DFI) in view of the challenging operating environment for the time being.

Ong and Tan have also cut their target price estimate on DFI to US$3.50 ($4.75) from US$3.80, which is still based on 18.5 times price-to-earnings (P/E) for 2022, 1 standard deviation (s.d.) below DFI’s five-year historical mean.

In its interim statement for the 3QFY2021 ended September, the group shared that its overall results were lower y-o-y due to the significant impact from the Covid-19 pandemic.

Losses by its key associate Yonghui also contributed to the lower performance during the quarter.

See: Incrementally positive newsflow to benefit Dairy Farm International in the near term: UOB Kay Hian

In the 3QFY2021, DFI’s grocery retail and home furnishings segments saw declines, while its convenience and health & beauty segments saw y-o-y revenue growth.

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To this end, Ong and Tan believe DFI’s earnings will remain “under pressure” going into the 4QFY2021.

The health & beauty segments, which used to be the key profit contributor to the group, is likely to remain under pressure due to the closure of the border between Mainland China and Hong Kong.

“We also expect [the] grocery retail segment to be impacted by elevated demand tapering off given loosening of mobility restrictions in most of DFI’s operating geographies in 4Q,” add the analysts.

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Yonghui is also likely to be another big drag, note the analysts. CGS-CIMB’s China consumer analyst Lei Yang expects margins to remain under pressure for the next two to three years. Yonghui is expected to revamp its store portfolio and product structure to better cater to its consumers’ shopping behaviour.

That said, there may be light at the end of the tunnel, say Ong and Tan. Hong Kong’s land border with Mainland China could reopen fully to quarantine-free travel by June 2022 at the latest.

The reopening could begin as early as mid-December. It will be done in three stages, with initial trials limited to travel from the Guangdong province with a quota system and priority given to business exchanges and those visiting the elderly.

The return of Chinese tourists could aid earnings recovery for DFI’s health and beauty segment in the 1HFY2022, observe the analysts.

However, recovery momentum will depend on the pace of border reopening and quota expansion.

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For the time being, the analysts have cut their earnings per share (EPS) forecasts for the FY2021 to FY2023 by 2.2-23.5% on the back of lower margin assumptions and higher Yonghui losses.

For more stories about where money flows, click here for Capital Section

“We will turn more positive on more clarity on HK-China border reopening plans, or stronger margin expansion," they write.

As at 1.21pm, shares in DFI are trading 3 US cents higher or 0.9% up at US$3.35, or an FY2021 P/B of 3.75 times and dividend yield of 1.78%.

Photo: Bloomberg

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