Dairy Farm - RHB Invest 2019-03-20: Accumulate For Longer Term; Upgrade To BUY


Dairy Farm - Accumulate For Longer Term; Upgrade To BUY

  • Upgrade to BUY from Neutral with a new USD8.25 Target Price from USD8.64, 11% upside plus 3% FY19F yield.
  • It has been challenging for the supermarket/hypermarket division over the past four years. Dairy Farm's share price saw a sell-down after the group made major write-downs and provisions to this division in 4Q18.
  • YTD, Dairy Farm's share price has plunged 19%, underperforming the STI considerably. We believe Dairy Farm's share price is at its trough, and long-term investors may look to accumulate the stock at its low.

Resetting the food business.

  • In the last two years, Dairy Farm International Holdings (SGX:D01) has changed 80% of its management team. With fresh sets of eyes, the new team recognised the legacy issues within the food business and took a one-off USD453m business restructuring charge on the division. The bulk of the cost came from writing down the goodwill associated with Giant supermarkets and hypermarkets business across South-East Asia and impairment of underperforming assets.
  • Moving ahead, we lower FY19F-21F earnings by 4-6% to account for further expenses to lower consumer prices and revitalise the Giant stores.

Still, FY19F EBIT could see some respite after FY18 provisions.

  • Of the USD453m one-off charge, USD83m was attributed to onerous lease provisions. Assuming the leases were spread out evenly across three years, we would expect to see opex reduced by c.USD28m per year.

Plus, growth coming from higher associates’ contributions.

  • Dairy Farm International's 2018 results were a low base with core PATMI of USD424m excluded one-off charges.
  • We note that FY18 has not included results from its 20% stake in Robinson Retail Holdings Inc (RRHI). We estimate RRHI could contribute an additional USD20m to FY19F earnings. On top of that, the group only recorded nine months of Yonghui Superstores Co’s (601933 CH) performance in 2018. We believe Yonghui’s full-year contribution could add another c.USD20m to Dairy Farm’s share of associates.

Work in progress.

  • While there is no fast turnaround for Dairy Farm International's supermarket/hypermarket division, we note that work is in progress to right-size the business as well as improve prices, offerings and presentation.
  • We believe near term growth could still be driven by higher contributions from its health & beauty division and strong associates, while home furnishing is likely to see higher revenue offset by pre-opening costs for new stores.

Accumulate for longer term.

  • We expect core PATMI to grow at 11% CAGR over the next three years.
  • We believe long-term investors may find Dairy Farm International's current valuation interesting, given that the stock is now trading at 20x P/E, a discount to peer average of 23x.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-03-20
SGX Stock Analyst Report BUY UPGRADE NEUTRAL 8.25 DOWN 8.64