Dairy Farm - DBS Research 2020-03-25: Beneficiary Of COVID-19 Lockdown


Dairy Farm - Beneficiary Of COVID-19 Lockdown

  • Brisk Supermarket/Health & Beauty sales as COVID-19 outbreak worsens around the world.
  • Raised Dairy Farm (SGX:D01)'s FY20-21F earnings by 3% each on more robust sales.
  • Forward PE valuation has corrected to near 15-year low at close to -2SD of its mean, dividend yield at > 5%.

We are open during COVID-19 lockdown

  • We turn positive on Dairy Farm as grocery retail sales are expected to remain resilient during this period. Even with the worsening of COVID-19 across the world and more social distancing/travel restrictions in place, we believe supermarket sales would continue to be brisk at the expense of F&B Food services as consumers across Asia consume meals at their homes.
  • Since our last note Dairy Farm - DBS Research 2020-03-06: Needs Time For A Successful Transformation, Dairy Farm's share price has corrected by as much as c.22%, which we believe is now overdone. Valuations are now near -2SD of its 15-year mean PE valuation at a compelling 15.4x FY20F PE.
  • Core grocery retail business is attractively valued at under 10x earnings, after stripping out the value of its stakes in RRHI and Yonghui. Given that earnings would be supported by brisk sales during the COVID-19 outbreak, we believe downside for the stock is limited.
  • Dividend yield is attractive at over 5%, with low risk of DPS cut, as we do not think parent company Jardine Strategic (SGX:J37) will reduce their dividend receipts from Dairy Farm. See Dairy Farm Dividend History.

Brisk grocery sales as COVID-19 outbreak spreads:

  • Dairy Farm’s revenue should increase as more stay home as social distancing is encouraged as a result of the COVID-19 outbreak.
  • Since our last note, countries have imposed more stringent restrictions on travel. Locals are encouraged to stay at home to avoid crowds, which would lead to higher food consumption at home and lower onsite F&B Food service sales. Such consumer behavior should drive higher demand for supermarket sales in addition to panic buying by consumers in anticipation of a lockdown.
  • In addition, Health & Beauty would also benefit from higher sales volumes of healthcare products such as masks and sanitisers. A prolonged outbreak would continue to sustain demand for food and healthcare products as well.

Low risk of supply chain disruption:

  • Risk of supply chain disruption is not expected to be high as Dairy Farm and its suppliers have varied procurement sources and are flexible enough to switch products or sources when required. Besides, the channels already have sufficient inventories, with ample time to switch sourcing strategies when needed.

Raised FY20-21F earnings by 3% each:

  • We expect sales to be brisk led by Supermarkets and Health & Beauty segments and have raised our sales per store assumptions to reflect better demand for supermarket and healthcare products.
  • At the associates/JV level, we have also raised our estimates largely on the back of better performance and contribution from Yonghui Superstores. Operating margins are projected to be higher in anticipation of better sales mix of high margin essential products. Factoring in these changes, we have raised FY20-21F earnings by 3% each.

Upgrade to BUY with higher Target Price of US$4.70:

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-03-25
SGX Stock Analyst Report BUY UPGRADE HOLD 4.7 DOWN 5.200