Dairy Farm - DBS Research 2017-03-06: Efficient operations to drive growth

DAIRY FARM INT'L HOLDINGS LTD D01.SI

Dairy Farm - Efficient operations to drive growth

We maintain our BUY rating on Dairy Farm (DFI) with a higher SOTP-based TP of US$9.96. Current share price ex-Yonghui values DFI’s core business at just 21.4x forward PE, below the regional peer average and its 9-year historical average forward PE of 25x. We see growth supported by more margin improvements ahead.
2H16 results delivered stronger earnings driven by better operating efficiencies as anticipated. We continue to be positive on further cost efficiencies from enhanced operational processes through distribution centres, procurement and IT systems.
In line with growth traction, we also expect DPS to increase in FY17F based on c.60-56% payout ratio, leading to slightly higher dividend yield.

Earnings came in at US$270m (+16% y-o-y) led by margin expansion, with revenue growth of just 1.7% y-oy (US$5.6bn).
Revenue growth was driven strongly by North Asia, largely its HK Supermarkets and HK & China convenience stores, Health & Beauty, and Home Furnishing segments.
Store rationalisation in Singapore and Indonesia helped to improve margins in supermarkets/hypermarkets segment though the closure of loss making stores.
There was also improved contribution from Maxim’s and Yonghui at the associate level.

Our target price of US$9.96 is derived from sum-of-parts valuation methodology. We value DFI's core business at US$9.34 based on DCF and the 20% stake in Yonghui based on the market value at US$1.09 and net debt at US$0.47 per share.

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/ 2017-03-06

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 9.96 Up 7.030