Dairy Farm - RHB Invest 2017-03-06: Ride The Uptrend

Dairy Farm - RHB Invest 2017-03-06: Ride The Uptrend DAIRY FARM INT'L HOLDINGS LTD D01.SI

Dairy Farm - Ride The Uptrend

  • FY16 results were positive and in-line with expectations. Underlying profit grew 7%, mainly on margin expansion. 
  • We are encouraged that growth was achieved against a weak consumer sentiment in most of its markets, rental pressures in its core Hong Kong market, and weaker regional currencies. 
  • We believe the company is still in the early phase of a giant operational improvement upcycle, initiated by the major corporate re- organisation in 2014. 
  • Dairy Farm remains a conviction BUY, with a higher TP of USD10.00 (from USD8.50, 18% upside).

Margin improvements in Supermarkets division 

  • Margin improvements in Supermarkets division was stronger than expected at 3.7% in 2H16 (vs 3.1% in 2H15). This further validates our central investment thesis of structural margin improvement opportunities in Dairy Farm’s biggest division. 
  • We expect this to continue in 2017, as management continues executing on increasing fresh food and private label penetration, direct sourcing and rationalising unprofitable stores. 
  • Margins are heading in the right direction, but still has significant room to catch up with regional peers. A new fresh food distribution would open in Malaysia in 2017.

Still in the early phrase of an upcycle. 

  • We believe that the positive results in 2016, reflects some easy wins, such as store rationalisation (mainly Singapore and Indonesia), from Dairy Farm’s major strategic re-organisation started in 2014. 
  • Going forward, we believe there is much more growth to come; including faster growth in China where its 7-Eleven in Guangdong has just gone past 800 stores, private label product penetration where management has invested heavily, bulk and direct sourcing as a group and growth in promising new markets such as Philippines and Vietnam.

Improving product range as a key strategic initiative. 

  • One important message from management during the results briefing was the aim of pushing for greater product range and quality across its businesses, as a retail differentiator and for competitive advantage. 
  • We are in agreement, and in fact view it as a necessary move, as we expect rising income levels, as well as growing e-commerce activities in Asia, would increase consumer demand for product choices.

Maintain BUY, with a higher TP, remains a conviction Top Pick. 

  • We adjust our FY17F-FY18F earnings upward by 2-4% due to stronger momentum of margin growth, and introduce FY19F. 
  • Our new TP of USD10.00, implies 25x FY17F, in-line with regional peers. This set of results gives us further conviction in the medium-term growth of Dairy Farm. 
  • Key risk in our view is the possible depreciation of regional currencies against the reporting currency – USD, given the expected US Federal Reserve rate hikes in 2017.

Singapore Research Team RHB Invest | http://www.rhbinvest.com.sg/ 2017-03-06
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 10.00 Up 8.500