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Brokers' take: Dairy Farm downgraded on slower growth outlook, lower associate contribution

BROKERS downgraded Dairy Farm International's (DFI) stock on Monday morning in separate notes, citing a slower growth outlook for the pan-Asian retailer, and higher operating expenses from its associate, Yonghui Superstores.

DBS Group Research downgraded the stock to "hold" from "buy" with a target price of US$9.35 with a 1 per cent upside, and CGS-CIMB Research similarly downgraded it to "hold" from "add" with a US$9.55 target price with a 3.5 per cent upside.

RHB Research downgraded its call to "neutral" from "buy", with a new target price of US$9.60 with a 5 per cent upside.

As at 10.26am on Monday, DFI's counter had shed 3.72 per cent on the local bourse to trade at US$8.81 apiece.

In its note, DBS said that it projected earnings growth at a slower pace in fiscal 2018, dragged by lower contribution from associate income especially Yonghui, and higher operating costs.

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"The turnaround of the supermarket/hypermarket business now requires more time given (the) current cost challenges as seen in H1 2018 numbers, competition, and effort needed to implement infrastructure, product range and competitive pricing strategies going forward," the broker wrote.

CGS-CIMB similarly noted that DFI's supermarket and convenience store divisions saw revenue growth, but Ebit (earnings before interest and taxes) narrowed to US$69.6 million, largely on some US$22 million in losses in the South-east Asia supermarkets, leading to its overall sector Ebit margin falling to 1.7 per cent.

The "main culprits" in the South-east Asia supermarkets were Malaysia and Indonesia which continued to struggle against the competition, especially in the hypermarket format.

"DFI guides that appropriate plans continued to be effected but may take time to bear fruit," wrote analysts Cezzane See and Lim Siew Khee.

RHB said in its note that Sheng Siong is preferred for Singapore-listed consumer stocks, with the stock trading at 19 times fiscal 2019 price-to-earnings ratio (P/E), a discount to DFI's.

"We think it (Sheng Siong) offers a defensive investment since almost all of its income is derived from Singapore. We expect earnings growth to be stable at 10 per cent CAGR (compound annual growth rate) over the next three years," analyst Juliana Cai wrote.

All three brokers noted that DFI's health and beauty division was a bright spot in earnings, with the segment also expected to continue into 2018's second fiscal half, driven by an increase in mainland Chinese tourists in Hong Kong and Macau.

The retailer, part of the Jardine Matheson Group, operates over 7,100 outlets staffed by some 200,000 people.

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