Dairy Farm - RHB Invest 2016-08-08: Take Another Fresh Look

Dairy Farm - RHB Invest 2016-08-08: Take Another Fresh Look DAIRY FARM INT'L HOLDINGS LTD D01.SI

Dairy Farm - Take Another Fresh Look

  • Recent 1H16 results reaffirmed our belief that Dairy Farm remains poised for strong medium-term growth. 
  • Despite the challenging environment, the company has stemmed profit declines at its biggest Food Division. 
  • We also visited a Yonghui store in Shanghai, and came away impressed by its fresh food offering which Dairy Farm is trying to leverage upon. 
  • With JD.com also recently becoming a shareholder in Yonghui, it could turn out to be an astute investment. 
  • Maintain BUY, with higher USD8.60 TP (26% upside).

Changes and investments over the past few years are bearing fruit

  • Changes and investments over the past few years are bearing fruit, with profitability at its biggest Food Division stemming two consecutive years of YoY declines in its recent 1H16 results. We believe this is a combination of:
    1. Disciplined rationalisation of stores in Indonesia and Singapore; 
    2. Improving supply chains;
    3. Country management changes.
  • While profit at its Health & Beauty division declined, we believe this is largely a one-off issue in Mannings Hong Kong and results should normalise in 2H16. 

Fresh food penetration a key strategy pillar. 

  • We believe margin structure for this category is favourable, especially in more developed cities. 
  • Penetration has increased by 2% over the past three years, and with the recent opening of its 75,000 sq ft fresh food distribution centre in Singapore, we expect management to push this strategy further across the company. 
  • With its partnership with Yonghui in China and Dairy Farm’s pan-Asian supply chain, this has the potential to bring up below-peers margins in its Food Division over the medium term.

Potential to grow in China. 

  • The company has been increasing stores (7-Eleven in Guangzhou and Mannings) at a very measured pace since 2012 and we believe this could accelerate. This would be due to its partnership with Yonghui, which could contribute local knowledge, as well as increase sales per store – which is approaching a more sustainable expansion model. 
  • We recently visited a Yonghui store in Shanghai, which impressed us in terms of its offering of fresh food. 

Maintain BUY. 

  • As evident in 1H16 results, Home Furnishings and Restaurants divisions are growing rapidly to become important profit centres and we expect the trend to continue. We lower our net profit estimates by 2-4% for FY16F-18F. 
  • Importantly, lower capex spent in 1H16 shows that our earlier long-term maintenance capex assumption is likely too conservative. 
  • Dairy Farm is a very strong cash generator and we remain convinced the stock is intrinsically under-valued. 
  • We fine-tuned our DCF-based TP to USD8.60 (previously USD8.50), implying 25x FY16F P/E. 
  • The key risk to our forecasts is a slowdown in consumer spending.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-08
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 8.600 Up 8.500