Dairy Farm - RHB Invest 2017-03-06: Ride The Uptrend

DAIRY FARM INT'L HOLDINGS LTD D01.SI

Dairy Farm - Ride The Uptrend

FY16 results were positive and in-line with expectations. Underlying profit grew 7%, mainly on margin expansion.
We are encouraged that growth was achieved against a weak consumer sentiment in most of its markets, rental pressures in its core Hong Kong market, and weaker regional currencies.
We believe the company is still in the early phase of a giant operational improvement upcycle, initiated by the major corporate re- organisation in 2014.

Dairy Farm remains a conviction BUY, with a higher TP of USD10.00 (from USD8.50, 18% upside).

Margin improvements in Supermarkets division was stronger than expected at 3.7% in 2H16 (vs 3.1% in 2H15). This further validates our central investment thesis of structural margin improvement opportunities in Dairy Farm’s biggest division.
We expect this to continue in 2017, as management continues executing on increasing fresh food and private label penetration, direct sourcing and rationalising unprofitable stores.
Margins are heading in the right direction, but still has significant room to catch up with regional peers. A new fresh food distribution would open in Malaysia in 2017.

We believe that the positive results in 2016, reflects some easy wins, such as store rationalisation (mainly Singapore and Indonesia), from Dairy Farm’s major strategic re-organisation started in 2014.
Going forward, we believe there is much more growth to come; including faster growth in China where its 7-Eleven in Guangdong has just gone past 800 stores, private label product penetration where management has invested heavily, bulk and direct sourcing as a group and growth in promising new markets such as Philippines and Vietnam.

One important message from management during the results briefing was the aim of pushing for greater product range and quality across its businesses, as a retail differentiator and for competitive advantage.
We are in agreement, and in fact view it as a necessary move, as we expect rising income levels, as well as growing e-commerce activities in Asia, would increase consumer demand for product choices.

We adjust our FY17F-FY18F earnings upward by 2-4% due to stronger momentum of margin growth, and introduce FY19F.
Our new TP of USD10.00, implies 25x FY17F, in-line with regional peers. This set of results gives us further conviction in the medium-term growth of Dairy Farm.
Key risk in our view is the possible depreciation of regional currencies against the reporting currency – USD, given the expected US Federal Reserve rate hikes in 2017.

Singapore Research Team RHB Invest | http://www.rhbinvest.com.sg/ 2017-03-06

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 10.00 Up 8.500