Dairy Farm International - DBS Research 2020-10-23: Transforming For The Better


Dairy Farm International - Transforming For The Better

  • Expect supermarket sales to remain elevated despite moderating from the 1H20 peak.
  • Cut Dairy Farm's FY20-22F earnings by up to 6% on lower Yonghui contribution.
  • Transformation remains on track, PE valuation compelling at -2 SD, < 10x forward core PE and below peer average.

Transformation plan intact.

  • We remain positive on Dairy Farm International (SGX:D01) as valuation vis-à-vis earnings outlook remains attractive.
  • Dairy Farm is undergoing its multi-year transformation plan, which remains on track for operational improvement. We have already seen results in margin improvement from its 1H20 earnings report. We believe this is on track to drive long-term operational efficiencies.

Attractive valuation.

  • Dairy Farm's valuation is attractive at -2 SD of its four-year forward mean PE. Headline forward PE of under 17x is below ASEAN peers’ average of 20-25x. Besides, stripping out its stake in Yonghui and Robinson’s Retail Holdings, core business remains compelling at under 10x PE.

Slight setback due to COVID-19.

  • While supermarkets were generally beneficiaries of COVID-19 lockdowns, Dairy Farm is also exposed to tourist-dependent markets.
  • Hong Kong’s Health & Beauty operations are impacted by lower tourist arrivals, as key China tourists dwindled in numbers. Health & Beauty segment across all markets contributed close to 30% of revenue in FY19. There are over 300 Mannings stores in Hong Kong vs 2,400 regionally, including more than 100 Guardian outlets in Singapore.
  • Convenience store sales were also disappointing during the regional lockdown earlier this year.

Supermarket sales remain elevated, despite easing.

  • Apart from weaknesses in Health & Beauty and convenience stores, supermarket sales performed well and remain at elevated levels both in Hong Kong and Singapore. In Singapore, we expect gradual easing of Circuit Breaker measures. This should keep levels of socialising and entertainment subdued as a good number of consumers continue to cook at home. These should keep supermarket sales robust on a y-o-y basis, even though sales are easing from the peak in 1H20.

Lower earnings expectations for Yonghui.

  • We expect Yonghui’s 3Q20 y-o-y sales growth to moderate to 12% (1H20: +23%), with same-store sales growth (SSSG) potentially running into a negative low single-digit rate. This is due to flood problems across various regions including Chongqing, Sichuan, Anhui, Zhejiang, etc. since Jun 2020 which affected some of its store operations including logistics for online deliveries, and the improving COVID-19 situation in China that has led to more out-of-home dining.
  • Nonetheless, we expect 4Q20 to resume a better momentum along with new store sales contribution, normalising traffic in physical stores, and the payoff of online sales promotional efforts.

Dairy Farm’s earnings to be impacted as well.

  • We revised our Dairy Farm's FY20- 21F earnings forecasts for Yonghui earlier this month after lowering our sales and earnings estimates due to a weaker-than-expected 3Q20 and wider losses from online associate Yonghui Yunchuang Technology Co Ltd which had incurred core losses of c.RMB500m in 1H20. Consequently, we are lowering our FY20-22F earnings forecasts for Dairy Farm by up to 6%.

Maintain BUY; lower SOTP-based Target Price to US$4.44.

Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-10-23
SGX Stock Analyst Report BUY MAINTAIN BUY 4.44 DOWN 4.860