Daiwa cuts Dairy Farm earnings forecasts as supermarket operator is ‘cleaning up the aisles’

Outlet of Cold Storage supermarket, which is owned by Dairy Farm, at Kinex mall in SingaporeOutlet of Cold Storage supermarket, which is owned by Dairy Farm, at Kinex mall in Singapore

Daiwa cut its earnings forecasts for supermarket operator Dairy Farm International, pointing to “pressing operational challenges” and store closures.

“For DFI’s Southeast Asia supermarket business, the main drag on overall performance, roadblocks to a potential turnaround appear most pronounced in the markets of Malaysia and Indonesia under the ageing and weakly executed Giant brand,” Daiwa said in a note Thursday.

It noted Dairy Farm closed 43 stores in those two markets last year, with recent checks indicating another 24 stores closed in Malaysia and eight in Indonesia so far this year.

“Our store visits in Malaysia suggest that a significant overhaul to rejuvenate the Giant brand lies ahead, which could translate to heightened cost pressures in the near term,” Daiwa said.

It added that in Hong Kong, comments from management on property strategy have raised the risk of restructuring charges for the Wellcome brand.

Daiwa cut its 2019-21 earnings per share forecasts by 3-7 percent after updating its store base assumptions, lowering its target price to US$7.82 from US$8.67.

But it kept a Hold call, pointing to earnings support from other areas of the business, including home furnishings and health and beauty. Dairy Farm plans to open new IKEA stores in Taiwan, Macau and Indonesia, it said.

“While we expect several areas of DFI’s portfolio still to record good business growth, a sustainable recovery in its core food business now appears more prolonged and uncertain,” Daiwa said.

The stock price fell 0.41 percent to US$7.26 by 1:15 P.M. SGT.

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