Daiwa downgrades Dairy Farm on ‘disappointing’ earnings

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Daiwa downgraded Dairy Farm International from Buy to Hold, saying earnings were “disappointing,” and the supermarket operator faced a longer-than-expected recovery.

“We note several negative surprises in Dairy Farm International (DFI)’s disappointing second half of 2018 results, which now suggest to us that there remain deep-seated operational challenges in the company’s food businesses,” Daiwa said in a note on Friday. That was despite other parts of its portfolio seeing growth, the investment bank said.

Dairy Farm reported on Thursday its 2018 net profit dropped 77 percent to US$92 million (S$124.27 million) after a US$453 million restructuring charge for the food business in Southeast Asia.

Daiwa said the magnitude of that restructuring expense came as a negative surprise.

Management had said it faced “significant challenges” from local operators in the region, both online and in traditional grocery formats, with plans for several countermeasures, including overhauling legacy systems to repositioning the hypermarket format, but that those could take at least five years, Daiwa noted.

“Management provided little conviction that its strategic review has reached a conclusion,” Daiwa said.

Daiwa cut its 2019-20 core earnings per share forecasts by 16-20 percent on lower margin assumptions for the supermarkets segment and lower expectations for the associate Yonghui’s contribution.

That led Daiwa to cut its target price to US$8.67 from US$10.80.

The stock ended Monday up 0.93 percent at US$8.65.

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