Brokers' take: DBS downgrades Dairy Farm International to 'hold', lowers target price to US$3.96

DAIRY Farm International D01 : D01 0% will likely face challenges in its grocery retail business due to normalising demand in the regions where the pandemic has stabilised, DBS Group Research said.

In a research report on Monday, DBS downgraded its call on the Jardine-owned retail giant to "hold" from "buy", and lowered its target price on the counter to US$3.96 from US$4.78, amid a weaker-than-expected performance across the group's segments.

The research team said the share of loss from the group's associates, especially from its Shanghai-listed supermarket chain Yonghui Superstores, "came as a surprise".

DBS had cut its earnings estimates for Dairy Farm largely because it previously forecasted profits for the associate. It also lowered valuations after noting that the share prices of Yonghui Superstores and Philippine-listed Robinsons Retail Holdings have both been on a downtrend.

Shares of Dairy Farm were trading at US$3.62 as at the midday break on Monday, down US$0.14 or 3.7 per cent, continuing their fall from last week after the group on Thursday posted a 69.5 per cent on-year decrease in net profit for the half-year period ended June 30.

DBS expects a normalisation of grocery retail demand could continue in key markets of Hong Kong and Singapore as pandemic restrictions are lifted, following the normalisation of its markets in Hong Kong and China.

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Although its convenience stores segment rebounded in H1 2021 amid a stable pandemic situation in China, a recent spike in Covid-19 cases in the country may create risks of another lockdown and dampen sales once again, DBS said.

The group's online channel, Yonghui Superstores, also saw lower margins amid stronger online competition, while its supermarket sales in Indonesia have been hit by consumers who switched to minimart chains amid a surge in Covid-19 cases, the research team added.

In addition, Dairy Farm's price investment strategy, to support consumption patterns shifting to favour value, will likely take time while the group's cost structure undergoes changes, leading to the group to face an extended period of lower margins in the meantime, DBS said.

However, the research team says the group's health and beauty segment could see a sharp recovery when two-way travel between mainland China and Hong Kong resumes, while its earnings for its home furnishing segment will likely be better in the second half of 2021 amid an improved pandemic situation in Taiwan. The two segments had previously been hit by low tourist arrivals in Hong Kong and pandemic restrictions in South-east Asia.

Shares of Dairy Farm closed at US$3.69 on Monday, down US$0.07 or 1.86 per cent.

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