Losing the touch: Sheng Siong, NTUC win big as Dairy Farm's profits slide in 1H

Profits are 11% below consensus expectations.

Dairy Farm fell far behind its competitors in the cutthroat race for customers in Q2. The first half of 2014 marked the slowest yoy sales growth since 2009, while the group experienced its first earnings contraction in eight years.

According to a report by CIMB, Dairy Farm’s Singapore operations conceded market
share to Sheng Shiong and NTUC Fairprice, as 1H14 turnover for the supermarkets/hypermarkets format was flat yoy at US$3,005m.

“With Singapore and Indonesia affected by cost pressures, the core EBIT for supermarkets/hypermarkets fell 11% yoy to US$118m. Supermarkets/hypermarkets achieved a core EBIT margin of 3.9% for 1H14 (1H13: 4.4%). Specifically, Dairy Farm is facing severe costs pressures from the restrictions in foreign labour hire in Singapore,” noted CIMB.

Here’s more from CIMB:

In our view, the main negative from the results was the continued margin pressure across all formats as Diary Farm experienced increased cost pressures, particularly in Singapore and Indonesia. The group achieved a core EBIT margin of 4.6%, down 0.4%pts yoy.

On a brighter note, Dairy Farm showed strong cash generation of US$313m (+31% yoy or 1.3x of headline profits) as it tightened its working capital management.

The group is in a net cash position of US$568m. The topline for both Cold Storage and Giant supermarkets declined yoy. Until now, it used to be that mass-market banner Giant was under pressure from competition, while upscale Cold Storage held up well. 

However, both banners now appear to be losing out to competition. In Indonesia, 81%-owned PT Hero (Hero IJ, Not Rated) achieved a robust 17% yoy sales growth in Rp terms. However, the strong growth was eroded when translated into US$.

In Indonesia, PT Hero’s EBIT margins dived to 0.8% from 3.6% in 1H13, on the back of increases in minimum wages, electricity charges and an expanded store base.

Further, some of the Giant supermarkets in Indonesia registered a mixed performance due to their remote locations.

Elsewhere, Hong Kong continued to perform strongly, while Malaysia stayed the course in its turnaround, with sales and profits higher than the previous year.