AS THE latest Covid-19 variant Omicron continues to spread through the key operating markets of Dairy Farm International (DFI) DairyFarm USD: D01 -6.82%, RHB Research has downgraded its rating on the mainboard-listed retail group to " neutral" from " buy" .

 

The move comes after DFI posted a 62 per cent decline in net profit on the back of lower revenue amid the pandemic, which constrained the group' s normal store operations and reduced traffic.

 

RHB' s lower price target of US$2.88 compared to US$4.42 previously implies 18 times FY2022 price-to-earnings estimates, close to -1 standard deviation from the stock' s 5-year mean.

 

This valuation is justified by a challenging and uncertain recovery outlook, said the research house in a report on Monday (Mar 7).

 

The research house has cut earnings estimates for FY2022 to FY2023 by 24 to 33 per cent to account for lower consensus estimates for DFI' s associate Yonghui, which incurred a significant loss over FY2021.

 

It has also factored in " more realistic" assumptions for the group' s North Asia markets, which accounted for 75 per cent of total sales in FY2021.

 

" Following its sharp earnings decline in FY2021, Dairy Farm' s outlook is now challenging and uncertain&hellip Notwithstanding our expectation of a slow earnings recovery to the pre-pandemic base level, we believe its current valuation has priced in most of the weakness - which justifies our stock rating," stated RHB' s research team.

 

RHB however remains positive on DFI' s confidence in capitalising on a recovery in consumer spending once conditions normalise, as guided by its management.

 

It also believes the group' s recent initiative to develop its own-brand products will allow the company to drive better value for its customers.

 

CGS-CIMB has also cut its price target on DFI to US$2.90 from US$3.50, while maintaining " hold" on the stock.

 

In view of current operating environment challenges, the brokerage' s new target multiple was lowered from 18.5 times to 16 times 2023 earnings estimates, which is 2 standard deviation points below DFI' s 5-year historical mean.

 

Its core earnings per share estimates for FY2022 to FY2023 have been cut by 24.2 to 27.5 per cent on the back of a slower pace of sales recovery for DFI' s health and beauty segment, as well as lower margin assumptions and higher losses from Yonghui.

 

Commenting on Hong Kong' s worsening Covid-19 situation, CGS-CIMB' s analysts highlighted in a report last Friday that recovery expectations for DFI have been delayed as a result.

 

On the contrary, UOB Kay Hian (UOBKH) has raised its target price on DFI to US$3.65 from US$3.60 while keeping " buy" on the stock.

 

Its earnings projections for FY2022 and FY2023 have been raised by 7 per cent and 4 per cent, respectively, to account for better trading prospects post the Covid-19 peak.

 

While its FY2021 net profit came in weaker than expected, UOBKH analyst Adrian Loh said he remains cautiously optimistic on DFI' s prospects on the belief that it is now past its trough earnings.

 

He also believes operating profit margin expectations are " reasonable" at present.

 

" In 2022, we believe that most of DFI' s key geographic segments should continue their reopening and recovery trajectory as the region learns to live with Covid-19 as an endemic," said Loh in a report on Monday.

 

" While Hong Kong remains a key problem with zero visibility on its transition to normalcy, we expect panic buying to bolster some of its results, and expect the other parts of DFI' s key segments to do better year on year in 2022, particularly associates and home furnishings," he added.