DAIRY FARM

DAIRY FARM | NEUTRAL (MAINTAINED)

OCT 8 CLOSE: US$8.95

TARGET PRICE: US$9.60

RHB Research, Oct 8

Recently an unofficial post on Facebook suggested that seven Giant supermarket outlets in Singapore could be closed. Management did not confirm the accuracy of the post, but stated that the group is reviewing the viability of three other outlets.

Although the closure/ relocation of underperforming stores is good for the company in the long term, we believe H2 2018 margins could be negatively affected by the clearance of stocks for the closing stores. Sales figures at existing stores are also not likely to pick up substantially to cover the shortfall, as the supermarket industry has been flattish in Singapore year-to-date while competitors - that is, Sheng Siong and NTUC FairPrice - gain market share by taking over Giant's exited premises.

We are not expecting a strong pick-up in performance in Malaysia either, as stronger consumer sentiment - buoyed by a general election in May - has not flowed to the hypermarket/supermarket segment.

The Malaysia Retailers Association also expects the supermarket industry to remain soft.

The group's larger-format stores in Hong Kong saw an uptrend in rental rates in H1 2018. Since Hong Kong's July and August supermarket sales were flattish, profit conversion should slow down, moving forward.

Moreover, Dairy Farm's H1 2018 results were largely held up by its strong performance in the health and beauty segment, particularly in Hong Kong and Macau.

However, as the Chinese yuan has depreciated by 5 per cent against the Hong Kong dollar since the start of the year, we think the growth in tourist spending may taper off.

As a result, year-on-year growth in its health and beauty segment could also decelerate.

Maintain "neutral" with an unchanged target price of US$9.60.

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