Dairy Farm International is suffering from a slew of downgrades and, or price target cuts following its FY2021 reports card which shows earnings has declined, dividends have been cut, and outlook remains challenging.
In a March 7 report, RHB Group Research has downgraded Dairy Farm International to “neutral” from “buy”, with a lowered target priuce of US$2.88 from US$4.42 previously.
“Dairy Farm’s outlook is now challenging and uncertain – in view of the threat of the new COVID-19 variant, and the stringent measures taken by governments in its key North Asia markets, which accounted for 75% of FY2021 total sales,” write RHB’s analysts in a team report.
“Notwithstanding our expectation of a slow earnings recovery to the pre-pandemic base level, we believe its current valuation has priced in most of the weakness – which justifies our stock rating,” adds RHB.
On March 3, Dairy Farm, part of the Hong Kong-based Jardine conglomerate, reported earnings of US$103 million for FY2021 ended Dec 2021, down two thirds over FY2020.
Revenue for FY2021 was down 12% to US$9.015 billion. If total sales of its joint ventures and associates are added, that’s US$27.7 billion, down 2% over FY2020.
Yonghui, Dairy Farm’s associate company in China, accounted for some US$90 million of the losses.
In line with lower earnings, the company will be cutting its dividend, proposing a final dividend of 6.5 US cents, bringing the full year payout to 9.5 US cents.
Nevertheless, RHB notes that Dairy Farm’s management is confident that it will be able to capitalise on the recovery in consumer spending once conditions normalise, thanks to the various strategies it put in place.
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These include driving digital innovation through the yuu Rewards programme, which has led to a high level of engagement and as well a stronger focus on ecommerce.
In addition, Dairy Farm is pushing ahead with the development of its house brands, such as Meadows, Yu Pin King and own-brand Giant ranges, “which allow the company to drive better value for its customers.”
For now, RHB has cut earnings estimates for FY2022 and FY2023 by 24 to 33% to account for the lower consensus estimates for Yonghui, and more realistic assumptions – particularly for the North Asia markets.
The new discounted cash flow target price of US$2.88 tied to 18 times FY2022 earnings, near to Dairy Farm’s five-year mean.
CGS-CIMB’s Ong Khang Chuen, meanwhile, has cut his target price to US$2.90 from US$3.50. Similarly, Ong, who has kept his “hold” call on the stock, notes that Dairy Farm’s is undergoing a “bumpy road to recovery”.
He sees upside risks with more clarity on Hong Kong reopening its borders with China, which will bring back more shoppers from China.
On the other hand, if Dairy Farm incurs higher than expected losses on its ecommerce ventures, that’s downside risks.
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DBS Group Research’s Woon Bing Yong has also cut his target price on the stock. From US$3.96 previously, Woon has kept his call on this stock a “hold” but with a reduced target price of US$3.01.
He notes that Dairy Farm is trying to transform but the results will not be seen overnight, and meanwhile, the pandemic may have changed consumption patterns.
“In our view, Dairy Farm’s price investment strategy may lead to a period of lower margins and will need time to bear fruit as cost structure changes are implemented,” writes Woon in his March 7 report.
Not all analysts turned negative though.
"The key unknown is Hong Kong which could remain a millstone around DFI’s neck in the medium term, although grocery and retail may see a near-term sales bump from panic buying," notes UOB Kay Hian in a March 7 report, where its "buy" call was maintained,
"Nevertheless, we remain constructive on DFI and believe that we are past its trough earnings," adds UOB Kay Hian, which has a new target price of US$3.65 from US$3.60 previously.
