Dairy Farm International - DBS Research 2020-04-29: Transformation Intact

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

Dairy Farm International - Transformation Intact

Weak performance for Health & Beauty and Convenience Stores anticipated for 1Q20.
Dairy Farm's FY20-21F earnings lowered by 18-19% to reflect the weakness in those segments.
Transformation on track for South East Asian Supermarkets despite near term headwinds.

Valuation attractive at -0.5 SD of historical mean, > 4% dividend yield; maintain BUY on a lower Target Price of US$5.10.

Dairy Farm (SGX:D01) issued a business update for 1Q20 that points to overall performance affected by deterioration of North Asia Health & Beauty, Maxim’s and the Convenience store segments. We believe 1Q20 earnings would be lower y-o-y.

Health & Beauty and Convenience Store performance in North Asia has been particularly weak due to consumers staying home. The lack of tourists travelling to Hong Kong has affected North Asia’s Health & Beauty segment, while the convenience store segment was hit by lower footfall across China, Hong Kong, and Singapore.

Sales and margins of the IKEA Home Furnishing segment were higher, lifted by new stores which were absent last year and e-commerce growth, and lower costs especially startup costs recorded last year.

The Supermarket/Hypermarket segment saw strong Same Store Sales Growth (SSSG) largely due to people staying home. Transformation plans are ongoing and performances of its South East Asian stores continue to improve.

In response to the update, we are lowering our earnings estimates to reflect a weaker outlook for both the Health & Beauty and Convenience store businesses as sales momentum is expected to be slower than previously anticipated. We now assume that sales in the Convenience Stores and Health & Beauty segments will each fall by close to 30% y-o-y.

We expect overall margins to remain stable as we factor in better margins for Home Furnishing and Supermarket/Hypermarkets business, offset by lower contribution from the higher margin Health & Beauty segment. For IKEA stores, there would be absence of start-up losses going forward and hence we are reflecting better margins for the Home Furnishing segment.

Dairy Farm remains a multi-bagger re-rating play on its transformation strategy. Earnings may be derailed by the COVID-19 outbreak in the current quarter, but positives in the transformation process continue to come through in key areas such as South East Asia supermarkets showing improving operational efficiency.
Having factored in the weak outlook as highlighted in its 1Q20 update, the stock trades at 21.4x/19.0x FY20/21F PE or -0.5 SD of its long-term average forward PE and is way below peer average of 24x, and offers 4.4% dividend. In view of the multi-year transformation plan coming through eventually, we maintain our positive stance on the stock.

Our SOTP-based Target Price for Dairy Farm is now lower at US$5.10 following the earnings cut. Core business based on DCF is valued at US$3.03, its 20% stake in Yonghui is valued at US$2.42 based on our Target Price for Yonghui, its 18% stake in RRHI is US$0.26 based on market value, and net debt is US$0.61.
See Dairy Farm Share Price; Dairy Farm Target Price; Dairy Farm Analyst Reports; Dairy Farm Dividend History; Dairy Farm Announcements; Dairy Farm Latest News.
We continue to hold the view that there is minimal risk of dividend cut as we believe parent company Jardine would prefer to maintain the DPS payout.
Dairy Farm currently offers a dividend yield of 4.4%. Maintain BUY for close to 12% upside including dividends.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-04-29

SGX Stock Analyst Report BUY MAINTAIN BUY 5.10 DOWN 5.590