Why Dairy Farm's food business will fail to impress this year

Earnings predicted to slow down.

According to DBS, Dairy Farm's food business is likely to record lower profits in FY13F despite overall sales growth as it lowered margins to drive sales growth, while cost increases were seen in labour and utility. There was translation impact from the weaker Malaysian ringgit and Indonesian rupiah as well.

Here's more:

Lower margins for Food business division, possibly from lower selling prices. Margin investment in Singapore and Malaysia’s Food businesses led to earnings continuing to be slightly lower than in the previous year. Its decision to lower margins to drive sales suggests that it might have lowered selling prices in Singapore and Malaysia.

Higher labour costs and rents in Singapore. We believe higher labour costs and the rental increase of 2-3% in the general property market this year could have impacted DFI’s cost in Singapore.

Singapore’s stricter foreign labour quotas and increasing annual foreign labour levies mean that companies that employ foreigners will be challenged by higher staff costs.

Malaysia’s margins could be lower than previous years. In previous quarters, Malaysia went through a restatement reversal charge of US$67m for overstating supplier income in Malaysia for the past few years.

We gathered that its Malaysia team has restructured and a new team is now in place.

We deduce that the impact of FY12F’s reversal of supplier income could mean lower margins going forward for the Food business division.