Dairy Farm - DBS Research 2020-04-15: Flying Off The Shelves


Dairy Farm - Flying Off The Shelves

  • Expect more robust outlook on sales in ASEAN, Hong Kong and China driven by COVID-19.
  • Raise Dairy Farm's FY20-21F earnings by 5-7% on more positive demand for grocery retail sales.
  • Valuation compelling with PE trading at near -1SD of its historical mean, yield is attractive at 4.3%.

More positive on outlook

Valuations still attractive as we see more positives for the stock:

  • Since our last update to a BUY recommendation, Dairy Farm (SGX:D01) has returned c.22% from US$3.96, hitting above our target price of US$4.70.
  • Valuations remain attractive with the stock trading at -1SD of its historical mean PE. After we raised our recommendation to BUY on 25 March (see report: Dairy Farm - DBS Research 2020-03-25: Beneficiary Of COVID-19 Lockdown), we have been seeing more positive indicators that will drive higher earnings. Some of the factors include
    • Strong Hong Kong grocery retail sales momentum;
    • More stay-home advisories from ASEAN countries;
    • Yonghui’s nationwide market share gain according to data from Kantar.

Supermarket retail sales in Hong Kong showing strength:

  • The latest retail sales data from Hong Kong showed that supermarket sales for the month of February 2020 was up by 12% y-o-y. There should not be any Chinese New Year effect as this year’s festive dates fell on 25-26 January compared to 5-6 February last year. This indicates strong demand for supermarket sales in Hong Kong for February 2020.
  • Outlook for supermarket sales should remain robust given strong momentum backed by the social-distancing crowd and staying home as a result of COVID-19.

China operations see more positives as Yonghui gains market share nationwide:

  • We note that Yonghui had gained market share in China in January and February 2020 at 4.8% of the China market, based on data from Kantar. This compares to 4.6% at end-2019 and 4% at end-2018. Yonghui’s share price has also recovered from RMB9.92 to RMB10.66 now. Both of these would be positive for Dairy Farm’s earnings contribution and our SOTP-valuation for Dairy Farm.
  • China cities are slowly opening up and normalisation of activities would be beneficial for Dairy Farm’s Starbucks and 7-Eleven outlets as well.

ASEAN lockdown beneficial to grocery sales:

  • Further to our last upgrade on Dairy Farm,
    1. Singapore has implemented a Circuit Breaker which has seen students and majority of the workforce staying home;
    2. Malaysia has extended its Movement Control Order by another month from 31 March to 28 April 2020;
    3. Indonesia has implemented Pembatasan Sosial Berskala Besar (PSBB) measures to contain the COVID- 19 situation.
  • We are now more positive on higher demand for groceries following the implementation of these plans.

Raise earnings forecasts by 5-7%

  • Given a more bullish outlook for grocery retail sales across ASEAN, Hong Kong and China, we raise our FY20-21F earnings forecasts by 5-7%. The higher earnings include more robust sales for the supermarket segment, and higher operating margins as operations improve along with some government support packages.
  • We impute higher Yonghui earnings growth expectations into our associates/JV income as well.

Maintain BUY with higher Target Price of US$5.59

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-04-15
SGX Stock Analyst Report BUY MAINTAIN BUY 5.590 UP 4.70