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Broker's take: CGS CIMB lowers Dairy Farm to 'hold'

CGS CIMB Research has downgraded its rating on Dairy Farm International Holdings from 'add' to 'hold', reducing its target price on the stock to US$8.40 from US$9.18 previously.

At 11.19am on Friday, Dairy Farm was trading down 21 US cents or 2.6 per cent to US$8.01 apiece.

In a research note released on Friday, analysts Cezzane See and Lim Siew Khee said that while they are encouraged by the unchanged final dividend of 14.5 US cents which took total dividend for FY17 to 21 US cents, a strategic review especially for the South-east Asia region, is still underway.

This review, helmed by new CEO Ian McLeod who joined the group in September last year, may take time to bear fruit, the analysts said.

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On Thursday, the retail group admitted that it had put up a "disappointing" performance for 2017, with a net profit attributable to shareholders of US$403.5 million for the year ended Dec 31, down from US$469 million the year before. Earnings per share were also lower at 29.82 US cents from 34.68 US cents last year.

In particular, a series of loss-making stores in Indonesia, Singapore and Malaysia were closed in the fourth quarter, and a major clearance exercise was undertaken across South-east Asia to liquidate excess old stock, predominantly in general merchandise.

This resulted in US$64 million in business change costs, which hurt overall profits.

"Positive performances in most of the group's formats and key associates were offset by weakness in the supermarket and hypermarket businesses, largely in South-east Asia," Dairy Farm said.

These were in tandem with the analysts' comments stating that the group's core net profit had come in below their expectations, and that its sluggish food division had dwarfed growth in other divisions including its 'convenience stores', as well as 'health and beauty' segments.

Nonetheless, for fiscal year 2017, the group's revenue was up one per cent to US$11.3 billion from last year, while combined total sales, which include 100 per cent of its associates and joint ventures, were up 7 per cent to US$21.8 billion.

This was thanks to strong growth from its Shanghai-listed hypermarket and supermarket unit Yonghui Superstores, and its Hong Kong Maxim's outlets.

Looking ahead, the analysts foresee Yonghui and Maxim's as being key to Dairy Farm's net profit growth in the near term.

In 2017, Yonghui opened net 292 stores in mainland China, while Maxim's saw stellar sales and profit growth, largely due to strong performances from its branded products, particularly mooncakes, and its business in mainland China.

The analysts forecast associate earnings to grow by 10.5 per cent, 10.5 per cent and 4.5 per cent in 2018, 2019 and 2020 respectively.

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