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
- 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.
Still in the early phrase of an upcycle.
- 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.
Improving product range as a key strategic initiative.
- 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.
Maintain BUY, with a higher TP, remains a conviction Top Pick.
- 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.