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

DAIRY FARM INT'L HOLDINGS LTD (SGX:D01)

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 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.

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.

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.

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.

Our SOTP-based Target Price is US$4.70, with core business valued at US$3.12 based on DCF, its 20% and 18% stakes in Yonghui and RRHI based on market values at US$1.98 and US$0.21 respectively, and net debt at US$0.61 per share.
Our Target Price translates to a conservative 18.3x FY20F PE, below -1SD of its mean.
See Dairy Farm Share Price; Dairy Farm Target Price; Dairy Farm Analyst Reports; Dairy Farm Dividend History; Dairy Farm Announcements; Dairy Farm Latest News.
As a grocery retailer, Dairy Farm has strong cashflow generating capability. We believe risk of DPS cut is low as parent Jardine would want to receive dividends for cashflow purposes.
Upgrade to BUY on attractive valuation and more robust earnings going forward.

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