Dairy Farm - DBS Vickers 2015-09-22: Squeezed Valuations To Eventually Reflate


Dairy Farm - Squeezed Valuations To Eventually Reflate 

Upgrade to BUY on compelling valuations. 

  • We upgrade our rating to BUY with an SOTP-based TP of US$7.34. 
  • The stock currently trades at an attractive valuation of 18.5x FY16F PE at between -1.5 to -1SD of its 7-year mean. 
  • We believe its share price correction of -21% since our downgrade in early August has been overdone and has priced in structural cost challenges as well as weaker margins going forward. Share price now values DFI’s core business at just 18x PE. 

Core business valued at -1.5SD of its 7 1.5SD of its 7-year mean. 

  • We find value in DFI’s core business after stripping out the value of DFI’s 20% stake in Yonghui’s shares and net debt. Our analysis suggests that the current share price is now pricing DFI’s core business at 18x FY16F PE, a deep discount to peer and historical average PE multiple of 25x. 

Growth supported by store expansion, better efficiencies. 

  • We lower our FY16F/FY17F earnings by 3-4% to account for lower GDP growth and weak regional currencies. Earnings growth will still be supported by store expansion and better operating efficiencies albeit at a slower rate. Initiatives to support growth include more Mannings stores in Yonghui, more focus on private labels, e-commerce, fresh/ready to eat food, improvement in supply chain infrastructure (ie distribution centres) and inventory management (ie IT systems). 


SOTP valuation methodology. 

  • Our target price of US$7.34 is derived from sum-of-the-parts valuation methodology. We value DFI's core business at US$6.98 based on DCF and the 20% stake in Yonghui based on market value at US$0.95 and net debt at US$0.59 per share. 

Key Risks to Our View: 

Significant earnings disappointment. 

  • Our upgrade is premised on oversold valuations and a low likelihood of significant downward earnings revision. We believe it would take a significant earnings disappointment to derail our upside bias on the stock. Nonetheless, our earnings forecast is conservative.

Alfie Yeo DBS Vickers | Andy Sim DBS Vickers | http://www.dbsvickers.com/ 2015-09-22
DBS Vickers Analyst Report BUY Upgrade HOLD 7.34 Down 8.54