Dairy Farm - DBS Research 2016-03-10: Turning more efficient

Dairy Farm - DBS Research 2016-03-10: Turning more efficient DAIRY FARM INT'L HOLDINGS LTD D01.SI 

Dairy Farm - Turning more efficient 

  • Expect more efficient operations by FY17F 
  • We believe IT, procurement and supply chain investment should yield results by FY17F 
  • 2H15/FY15 earnings within expectations 
  • Maintain BUY, TP US$7.03

Maintain BUY on compelling valuations. 

  • We maintain our BUY rating with an SOTP-based TP of US$7.03. DFI trades at an attractive valuation of 17.9x FY16F PE at -1SD of its 7-year mean. 
  • With no major negative surprises in FY15 results, we continue to be positive on the stock. 
  • Strategies like DC enhancements and inventory management systems are being put in place to turn more efficient. We expect growth to pick up in FY17F. 
  • The share price now values DFI’s core business at just 20x PE. 

Growth supported by unit volume sales, better efficiencies. 

  • DFI has been investing in IT, procurement and supply chain, and we expect this to at least yield some results by FY17F. 
  • We have already seen better inventory numbers in FY15 and we believe this should continue going into FY17F. 
  • On the demand side, DFI will be to drive average unit volume growth via building products and brands that identify with customers. 

FY15 results in line. 

  • FY15 results were within expectations. 
  • Revenue was US$11.1bn (+1% y-o-y) while earnings were US$424m (-17% y-o-y). Flat revenues were dragged by currency translation in Malaysia, but operating margins improving sequentially in 2H15 on better operating efficiencies. 
  • A final dividend of 13.5 UScts was declared, below our 16.5 UScts forecast. However, the dividend payout ratio is within the 59-69% range over FY09-14. 


SOTP valuation methodology. 

  • Our target price of US$7.03 is derived from sum-of-parts valuation methodology. 
  • We value DFI's core business at US$6.64 based on DCF and the 20% stake in Yonghui based on the market value at US$0.75 and net debt at US$0.36 per share. 

Key Risks to Our View: 

Significant earnings disappointment. 

  • We expect earnings growth to accelerate into FY17F as management rings in better operating efficiencies. 
  • 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/ 2016-03-10
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 7.03 Same 7.03