Dairy Farm - RHB Invest 2016-03-21: A Once In a Decade Opportunity

Dairy Farm - RHB Invest 2016-03-21: A Once In a Decade Opportunity  DAIRY FARM D01.SI 

Dairy Farm - A Once In a Decade Opportunity 

  • We believe consensus has underestimated the margin improvement potential in the medium term from Dairy Farm’s drive for more direct sourcing and sale of corporate brands. 
  • Share price and valuations are at their lowest point since 2010, presenting investors with a once-in-a-decade opportunity to accumulate this bellwether retail blue-chip. 
  • Reiterate BUY, with a TP of USD8.50 (from USD9.10, 45% upside). 

Positive on direct sourcing strategy. 

  • We believe there is much room to improve on gross margin in its supermarket/hypermarket segment, as the company reiterated its commitment to increase direct sourcing. This would be further enhanced through the addition of new fresh food distribution centres (DC) in Singapore in 2016 and Malaysia in 2017, as well as collaboration with its new associate Yonghui Superstores (601933 CH, NR). 
  • We estimate gross margin in this segment is less than 20%, compared to Sheng Siong (SSG SP, BUY, TP: SGD1.00), which had improved to 25% in 2015, from 22% (2011), partly on the back of a new distribution centre. 

Improving sales of corporate brands. 

  • We estimate that corporate brand sales have been increasing by double-digit growth YoY in the past 24 months. 
  • Management aims to push the sales proportion in this category from below 10% to 20% over time. This would improve overall margins and create differentiation, especially in its Health & Beauty category. 
  • We believe Dairy Farm has a very credible corporate brand portfolio and a scale that no other retailer in Asia ex-Japan has which would allow it to seize this opportunity. 

Country management changes could breathe new life. 

  • Singapore and Indonesia have been the under-performing markets in recent history, with disjointed operational strategies. 
  • We believe the recent country-level management changes in these two countries as well as in China could improve its performance going forward. 
  • For 2015, Dairy Farm had: 
    1. rationalised Giant and 7-Eleven stores in Singapore, and 
    2. shut down Starmart and provided for one-time inventory charges for its supermarket business in Indonesia. 

Reiterate BUY. 

  • Profit decline in FY15 was partly exacerbated by the weak regional currencies (vs its reporting currency USD), which we believe has abated. In constant currency terms, sales growth was steady (+5% YoY) and Dairy Farm has gained a market share in most markets. 
  • We believe this bellwether retail stock is significantly undervalued, taking into account the longer-term growth potential in Asia. 
  • We trim our DCF-based TP to USD8.50, implying 24x FY16F P/E. 
  • A key risk is the further short-term drag in earnings from weak consumer spending. 

James Koh RHB Invest | http://www.rhbinvest.com.sg/ 2016-03-21
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 8.50 Down 9.10