Dairy Farm downgraded by DBS on grocery sector headwinds

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. Photo taken pre-Covid

DBS downgraded Dairy Farm International to Hold from Buy and cut its target price to US$3.96 from US$4.78, citing intense competition and demand normalisation in the grocery retail sector.

“We think the grocery retail business may face challenges ahead in the form of normalizing demand in the regions where the pandemic situation has stabilised. Competition is also fierce in both the online channel (for Yonghui) and offline channel (for Indonesia),” DBS said in a note this week.

Lockdowns of businesses, especially restaurants, to stem the spread of the Covid-19 virus spurred a surge of sales for the grocery sector globally. As more regions ease pandemic-related restrictions, grocery store sales have headed toward pre-Covid levels.

Last week, Dairy Farm reported its first half underlying profit, which excludes non-trading items, dropped 69 percent on-year to US$32 million as ongoing Covid-related restrictions impacted trading in all the company’s markets.

Grocery retail profitability was impacted by lower sales as customer buying behaviour normalized after year-earlier lockdowns, but business fundamentals improved as the group implemented its multi-year transformation plan, including cost improvements, Dairy Farm said in a filing to SGX.

DBS said Dairy Farm’s strategy may lead to period of lower margins as it will take time from cost structure changes to be implemented.

The bank added that the stock could see a key catalyst from the potential return of Hong Kong-China travel. The health and beauty segment’s revenue dropped by around US$1 billion in 2020 as the flow of visitors from mainland China dried up, DBS noted.

“While the recent new Covid-19 cases in China may lead to a delayed reopening, the segment’s revenue could see a sharp recovery when two-way travel resumes,” DBS said.

Shares of Dairy Farm were up 0.81 percent at US$3.72 at 9:50 a.m. SGT.