SINGAPORE (Mar 4): Analysts are keeping a neutral stance on Dairy Farm, a member of the Jardine Matheson Group, following its FY18 results announcement.

Dairy Farm posted a 4% rise in sales to US$11.7 billion while underlying profit rose 5% to US$424 million. Net non-trading charge totalled US$332 million, which included a US$453 million restructuring charge for the Food business in Southeast Asia but was partially offset by a net gain of US$121 million principally in relation to business and property disposals.

See: Jardine Strategic and Jardine Matheson report lower FY18 earnings of US$1.84 bil and US$1.73 bil

RHB Research is maintaining its “neutral” recommendation on Dairy Farm with a reduced target price of US$8.64 from US$9.60 previously.

In 4Q18, the group recorded significant restructuring costs for its food division, which resulted in a 77% y-o-y drop in PATMI to US$92 million. Excluding the one-off costs, core PATMI for FY18 of US$424 million, 9.1% lower y-o-y, was still a miss, as the group only consolidated 9M of Yonghui’s performance and has not included the share of results from its newly acquired associate, Robinsons Retail.

In a Monday report, analyst Juliana Cai says, “With the new management announced at 1H18’s briefing, we believe the group took the opportunity to conduct a kitchensinking exercise in 4Q18 to make subsequent turnarounds faster.”

The group’s management has deemed its food division not viable in its current form, as it continued to be the primary factor of the group’s underperformance. Southeast Asia remained weak, while Hong Kong faced rising cost pressures.

“We believe the provision for underperforming stores could mean more store closures in FY19F. We expect to see gradual improvements in margins post-FY19,” says Cai.

Fortunately, the group’s health & beauty division saw sales increasing by 17% y-o-y and operating profit up by 59% y-o-y, offsetting the weakness from the food division.

Cai expects this sector to do well, with the continued growth in Hong Kong’s tourism sector.

Similarly, DBS Group Research continues to rate Dairy Farm “hold”, but with a lower target price of US$8.44 from US$9.35 previously.

In a Monday report, analyst Alfie Yeo says, “We see slower earnings growth outlook ahead as we believe Dairy Farm will take time to improve its Southeast Asian food business. In addition, HQ costs for the CEO’s newly assembled management team will also be higher going forward.”

The group has also put in place a multi-year transformation plan to achieve operational efficiencies, due to the ongoing competition and higher operating costs in the food business.

“We believe this will take time to implement. For now, we do not see significant upside for the share price until signs of green shoots start appearing for the Southeast Asia food business,” says Yeo.

Hence, the analyst expects a relatively muted outlook for the group and limited upside going forward.

As at 3.00pm, shares in Dairy Farm are trading at US$8.65 or 7.2 times FY19 book with a dividend yield of 2.5%.a