Extremely acute margin pressures choke Dairy Farm's recovery story in H1

More trouble on the horizon after unexpectedly weak results.

Acute margin pressures in its core ASEAN markets choked Dairy Farm’s recovery story in the first half of the year.

A report by CIMB highlighted that higher costs, weaker sales growth, and intense competition all worked to erode Dairy Farm’s profit margins during the period.

“All formats saw margins pressures. ASEAN remained a drag while the exceptionally strong HK showed some normalisation,” said CIMB.

For instance, convenience store earnings fell by 14% year-on-year due to weak performance in Singapore. In Indonesia, its Starmartbrand was also negatively impacted by regulations limiting the sale of alcohol. A further 39 loss-making stores were shut down and a strategic review of the business is currently being undertaken.

In its supermarket and hypermarket segment, the group’s Hong Kong operations were affected by significant escalation of rental and labour costs. Meanwhile, Singapore’s profits were lower due to competitive pressures and higher rents.

Its consistent star performer, the health & beauty segment, also posted an 8% year-on-year earnings decline on back of acute margin erosion in Malaysia. This was due to an increasing competitive landscape and weak consumer sentiment.

“We cut our FY15-17 EPS forecasts by 9-17% as we factor in lower margins. This reduces our residual income-income based target price (implied 27x CY16 P/E, its 5-year mean). The recent share price weakness suggests an upside potential, with stronger 2H a re-rating catalyst," said the report.