Dairy Farm International - CGS-CIMB Research 2020-09-09: Back At Palatable Valuations

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

Dairy Farm International - Back At Palatable Valuations

Dairy Farm's share price has retraced closer to YTD trough of US$3.70, at 17.2x forward P/E (close to -1.5 s.d. of historical mean), pricing in the weaker FY20F.
Medium-term prospects are uncertain, but we think sentiments for the stock will improve, at least to its -1 s.d. levels, once recovery plays are revisited. We view the risk-rewards as favourable for longer-term investors.
Upgrade our call for Dairy Farm International to ADD, with a lower target price of US$4.50 (on unchanged 20x FY21F P/E).

We stayed neutral post-Dairy Farm International (SGX:D01)’s last results, on concerns of Hong Kong’s 2H20F prospects. See report: Dairy Farm International - CGS-CIMB Research 2020-07-30: COVID-19 Strikes Harder Than Expected. But with Dairy Farm's share price correcting by c.7% since our last report on 30 Jul (trending closer to its YTD trough share price of US$3.70) and forward valuations now at c.17.2x FY21 P/E (closer to 1.5 s.d. below its historical mean), we believe the near-term uncertainties are priced in.
With an upside potential of 16.9% to our 12-month Target Price of US$4.50 (still based on 20x FY21F P/E, close to -1 s.d. from its 13-year average mean), we think valuations are favourable for longer-term investors who are looking to revisit recovery plays and willing to ride out the volatilities of the stock (due to Hong Kong uncertainties and uneven recovery in SEA markets).
We upgrade our call for Dairy Farm International to ADD (from Hold).
Potential re-rating catalysts are a swifter-than-expected resolution to the Hong Kong protests, better sales growth and margin expansion.
Downside risks are continued Hong Kong protests, weaker sales/margins in all segments and further dividend payout cuts.

Hong Kong retail sales in Jul 20 was still lower y-o-y (-23.1%), but the rate of decline has been reducing on a m-o-m basis since Mar 20.
Interestingly, Hong Kong’s medicine and cosmetic sales improved to a 50.9% y-o-y decline (from Jun’s 57.7% y-o-y decline), despite a still negligible number of China visitors to Hong Kong (-99.9% y-o-y).

According to our Hong Kong team, the number of new confirmed cases of COVID-19 in Hong Kong has declined in in the past few weeks, and post the completion of the Universal Community Testing Programme (UCTP) for COVID-19 (scheduled for 11 Sep), they believe there could be a gradual relaxation of cross-border travel within the Greater Bay Area. This bodes well for Hong Kong’s services sector.

We have trimmed our Dairy Farm International's FY20-22F EPS by 2.1-4.6%, as tighter Hong Kong restrictions in mid-Jul to Aug could hit 3Q20F earnings. We forecast FY20F EPS to fall c.29% y-o-y, and FY21F to still be below FY19’s EPS despite a c.32% y-o-y growth. See PDF report attached below for complete analysis.
Even post our earnings cuts; forward valuations are still below average 13-year mean of 25.8x and below regional peers’ forward P/E of c.21x. See Dairy Farm International's global peers comparison table in PDF report attached below.
We have pegged Dairy Farm International's Target Price close to its -1 s.d. from its long-term average (19.5x) to account for the medium-term uncertainties (social unrest, no definite date for border opening in Hong Kong and uneven recovery in SEA markets).
See Dairy Farm Share Price; Dairy Farm Target Price; Dairy Farm Analyst Reports; Dairy Farm Dividend History; Dairy Farm Announcements; Dairy Farm Latest News.

Cezzane SEE CGS-CIMB Research | https://www.cgs-cimb.com 2020-09-09

SGX Stock Analyst Report ADD UPGRADE HOLD 4.50 DOWN 4.630