Dairy Farm Int'l - CIMB Research 2018-03-24: Gearing Up The Philippines Business

Dairy Farm Int'l - CIMB Research 2018-03-24: Gearing Up The Philippines Business DAIRY FARM INT'L HOLDINGS LTD D01.SI

Dairy Farm Int'l - Gearing Up The Philippines Business

  • Dairy Farm International (DFI) plans to acquire an 18.25% stake, and be a partner with, Robinsons Retail Holdings Inc (RRHI) (Add; Target Price: PHP121) in a deal worth c.US$520m.
  • The deal is via share-swap of DFI’s Rustans stake (c.US$346m) and US$174m cash.
  • Estimated valuation range at forward 23-26x PER. Deal requires relevant approvals. Completion expected within 6 months. 
  • Positive for Philippines but believe SEA improvement could still be the main focus. Maintain HOLD with Target Price of US$8.40.

Seeking 18.25% of Robinsons Retail Holdings Inc (RRHI)

  • Dairy Farm (DFI) announced that it plans to acquire an 18.25% stake in Robinsons Retail Holdings Inc (RRHI) in a deal worth a cumulative US$520m; via
    1. a share-swap of DFI’s 100% stake in Rustans Supercenters (RSCI) for a 12.15% stake in RRHI (worth US$346m); and
    2. an additional US$174m for the remaining 6.1% of RRHI – to be funded via combination of cash and borrowings.
  • The deal is still subject to the approvals of the Philippines Competition Commission and the shareholders of RRHI (of which a majority has already undertaken to vote in favour). When finalised, DFI will have the right to nominate two directors to the Board of RRHI.
  • Robinsons Retail Holdings Inc (RRHI) is listed on the Philippines stock exchange and has a market cap of PHP119bn (c.US$2.3bn) as at 23 Mar. The Gokongwei family, one of the controlling shareholders, will continue to hold a 51% interest in RRHI post the completion of the deal. 
  • According to our Philippines research team, the Gokongwei family has interests in the telecommunications, petrochemicals, food, power generation, aviation and financial services industries. The market is consensus BUY on RRHI.

Valuation range estimated at 23-26x forward PER; deemed fair

  • Bloomberg consensus estimates RRHI’s CY18F/19F net profits of PHP5.8bn/6.5bn (US$109.6m-123.6m) implying a forward PER range of c.23-26x. While this is higher than DFI’s CY18-19F PER trading range of 21.3-19.4x, we deem it fair given RRHI’s:
    1. superior growth prospects (Bloomberg estimates 2-year EPS CAGR of 10.9% vs. our estimated 2-year CAGR of 6.2% for DFI), and
    2. scale. For comparison, DFI said RSCI churned a CY17 revenue of US$440m and immaterial underlying profit to DFI.
  • Rustans Supercenters (RSCI) operates 12 hypermarkets and 61 supermarkets, whilst Robinsons Retail Holdings Inc (RRHI) operates 1,718 retail stores including 154 supermarkets. DFI said the combined group will be one of the top three retailers in Philippines with over 1,700 stores post completion of the deal.
  • Funding wise, DFI could be able to stomach the US$174m given its net gearing currently stands at 0.3x.

Positive for Philippines; but SEA still needs to improve

  • We are positive that the deal could add scale for DFI’s Philippines business, given RRHI’s size. The 18.25% stake could translate to c.US$20m-22m to DFI’s associate income (CY17: US144m) but the additional associate income accounts for only c.3-4% of DFI’s estimated CY18-20F PBT of US$599m-US$657m.

Maintain HOLD

  • We maintain our estimates and call pending further details and completion of the deal
  • Whilst we believe the change in leadership (new CEO Ian McLeod joined in Sep 17), could usher in positive winds of change, especially for DFI’s weak SEA super/hypermarket division, we believe meaningful improvements will take time to bear fruit.
  • Our Target Price of US$8.40 is based on P/E of 21x (close to DFI’s -1 s.d of its average mean) on DFI’s CY19 EPS. 
  • Upside/downside risks are better/weaker sales growth and margin expansion.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-03-24
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 8.400 Same 8.400