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Broker's take: RHB downgrades Dairy Farm International to 'neutral'

RHB Research Institute has downgraded its recommendation on Dairy Farm International to "neutral" with the stock now close to its fair value.

Shares in the pan-Asian retailer have rebounded from a year-to-date low of US$7.34 in March and subsequent price corrections brought about by uncertainties on the US-China trade front.

The brokerage has a target price of US$8.25 for the stock. Dairy Farm shares were trading at US$7.83 at Thursday's midday break.

While the company's health and beauty (H&S) segment delivered "stellar results" across most markets for the first quarter, the segment could see slower growth for the second half of fiscal 2019 if consumer sentiment worsens, RHB analyst Juliana Cai said.

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Moreover, if US-China trade tensions worsen, Dairy Farm could see growth in its associate companies limited. Shanghai-listed hypermarket and supermarket operator Yonghui Superstores, which the street has a bullish outlook on, reports earnings in yuan. A depreciating yuan can affect Yonghui's contribution to Dairy Farm as the latter reports earnings in US dollars.

Going forward, Ms Cai expects that Dairy Farm's shares are likely to stay rangebound.

The one-off growth arising from the full-year contribution of Yonghui (versus a nine-month contribution for FY2018), maiden contribution from its Philippine-listed associate Robinsons Retail Holdings, new acquisitions from Hong Kong caterer Maxim’s and reduction in operating expenditure could mitigate downside risks in the H&S segment and weaker earnings in the food segment, Ms Cai said.