Its food division is floundering whilst its supermarkets suffer from poor locations and lack of improvement programmes.
Dairy Farm International Holdings could bank on its health and beauty segment to drive profit growth over the course of the year whilst its food division remains a drag to earnings, a report by RHB Research revealed.
The report highlighted how the firm saw its health and beauty department deliver "stellar results" during Q1 across most of its markets thanks to strong tourist footfall, with Malaysia and Indonesia seeing encouraging results.
That said, recent ground checks in the firm’s Kuala Lumpur and Singapore locations by RHB analyst Juliana Cai suggested that the group still has quite a number of hypermarkets and supermarkets caught in poor locations, or have not undergone store improvement programmes.
“We believe the restructuring programme is still very much ongoing,” Cai said, noting how a handful of Giant supermarkets in Singapore now feature new signboards, cool lighting and glass doors post-renovation. “As a result, we think the ASEAN supermarket business is likely to stay in the red in FY 2019.”
She further highlighted that the Hong Kong and Macau markets, which were holding up the food division’s earnings, are beginning to see margin erosion due to higher rental and labour costs. “The convenience store format is also suffering from higher operating costs. Consequently, we expect the food division to fare worse than last year,” Cai added.
According to the firm’s FY 2018 financial statement, the structural challenges in food continued to erode performance at an increased rate.
“Results in 2018 benefitted from particularly strong results from the health and beauty business and an increased contribution from convenience stores, which were offset by further deterioration in performance from the food business led by the supermarket and hypermarket formats,” said Ben Keswick, Dairy Farm's chairman and managing director.
A separate report noted how the firm was the Straits Times Index’s (STI) biggest decliner in 2019 YTD, falling 15% after its FY 2018 profits crashed 77% YoY due to the weakness in the food businesses and restructuring charges.
That said, Cai warned that Dairy Farm’s health and beauty segment could see slower growth in H2 2019, given how consumer confidence in mainland China seems to have been impacted by the US-China trade war, with retail sales growth slumping 7.2% YoY in April 2019. Its Hong Kong market also only saw a 2.3% YoY growth in total medicines and cosmetics retail sales in Q1 2019.
“Whilst YTD mainland tourist arrivals in Hong Kong grew in the mid-teens, we think growth in the health and beauty segment would slow down in H2 2019 if consumer sentiment worsens,” she noted.
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