Dairy Farm - DBS Research 2016-08-01: Road to recovery

Dairy Farm - DBS Research 2016-08-01: Road to recovery DAIRY FARM INT'L HOLDINGS LTD D01.SI 

Dairy Farm - Road to recovery

  • 1H16 results in line, driven by Yonghui and closure of some loss making stores.
  • Interim dividend of 6.5 UScts declared.
  • Operating margins look set to bottom.
  • Maintain BUY with US$7.18 TP.

Maintain BUY, operating profit to improve. 

  • We maintain our BUY rating on Dairy Farm (DFI) with an SOTP-based TP of US$7.18 with total potential return (including dividends) of 11%. Current valuations are attractive at 19.0x FY17F PE vs peer average of 21x, and currently values its core business at an attractive 19.0x FY17F PE. 
  • 1H16 results pointed to an improvement in operating margins from key segment, supermarket/ hypermarkets, and revenue growth in local currency terms. Yonghui also contributed strongly to associate/JV income. 
  • DFI ‘s outlook is positive with margins expected to be bottoming out and Yonghui contributing more to growth.

1H16 results in line. 

  • Revenue was US$5.5bn (-1% y-o-y) while net profit was US$199.3m (+4% y-o-y). Revenue and operating profit were lower than expected but better expected associate/JV income by Yonghui led to net profit coming in within our expectations. 
  • Although store count reduction led to lower revenue and operating profit, sales in local currency grew (+2% y-o-y) and operating margins for key supermarket segment improved as a result of reduction of loss making stores. 
  • With more loss making stores set to close, and Health & Beauty recovering from overstocking issue in 1H16, we expect margins to continue to improve. An interim dividend of 6.5 UScts was declared, within expectations.


SOTP valuation methodology. 

  • Our target price of US$7.18 is derived from sum-of-parts valuation methodology. 
  • We value DFI's core business at US$6.88 based on DCF and the 20% stake in Yonghui based on the market value at US$0.83 and net debt at US$0.53 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 that earnings would have to disappoint significantly to derail our positive bias on the stock. 
  • Nonetheless, our earnings forecast is conservative.

Alfie Yeo DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-08-01
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 7.18 Up 7.03