Dairy Farm's profits may edge up 11% over the next three years: analyst

Growth could be driven by higher contributions from its health & beauty division and associates.

Dairy Farm’s FY 2019 profit after tax and minority interests (PATMI) could grow at a compound annual growth rate (CAGR) of 11% over the next three years following its efforts to reset its food business and growth coming from higher associates’ contributions, according to a report by RHB Research.

In the last two years, Dairy Farm has changed 80% of its management team, which reportedly took a one-off $612.49m (US$453m) business restructuring charge on the division. “The bulk of the cost came from writing down the goodwill associated with Giant supermarkets and hypermarkets business across Southeast Asia and impairment of underperforming assets,” RHB analyst Juliana Cai explained. “Moving ahead, we lower FY19F-21F earnings 4-6% to account for further expenses to lower consumer prices and revitalise the Giant stores.”

The report further added that of the one-off $612.49m charge, an approximate $112.22m (US$83m) was attributed to onerous lease provisions. Assuming the leases were spread out evenly across three years, RHB Research said it expects to see operating expenses reduced by around $37.86m (US$28m) per year.

“Whilst there is no fast turnaround for its supermarket and hypermarket division, we note that work is in progress to rightsize the business as well as improve prices, offerings and presentation,” Cai said. “We believe near term growth could still be driven by higher contributions from its health & beauty division and strong associates, whilst home furnishing is likely to see higher revenue offset by pre-opening costs for new stores.”

Dairy Farm’s 2018 results were a low base with PATMI at $573.28m (US$424m), excluding the one-off charges. “We note that FY 2018 has not included results from its 20% stake in Robinson Retail Holdings, Inc (RRHI). We estimate RRHI could contribute an additional $27.04m (US$20m) to FY 2019 earnings,” Cai added.

The report also noted that the group only recorded 9M results of Yonghui Superstores Co’s performance in 2018. According to Cai, Yonghui’s full-year contribution could add another $27.04m (US$20m) to Dairy Farm’s share of associates.