DAIRY FARM INT'L HOLDINGS LTD (SGX:D01)
Dairy Farm - The New “Normal”; Keep BUY
- Hong Kong retail sales have remained fairly stable in July and August despite tightened restrictions during the period. We think this sets the new minimum benchmark for Hong Kong retail sales as tourism spending diminishes and locals decrease their discretionary spending. With the COVID-19 situation stabilising in Hong Kong, retail sales should bottom-out from here.
- Dairy Farm (SGX:D01), with its large exposure to Hong Kong, should see an improving risk-reward ratio at the current Dairy Farm share price.
A better 2H for Health & Beauty.
- Industry sales for Hong Kong’s medicine and cosmetic category has been hovering between HKD1.5-1.7bn/month since March and has been registering an improving trend despite tightening restrictions in July and August. As such, we view this level of sales as a base line for the Health & Beauty (H&B) segment, in the absence of tourism spending.
- In 1H20, Dairy Farm’s H&B segment generated USD1.0bn sales and USD42m operating profit, (EBIT margin: 4.1%). We expect better h-o-h sales in 2H20 as its other markets in China, Singapore and Malaysia should see improved economic activities upon the easing of restrictions, while the situation in Hong Kong remains fairly stable.
- Operating margin should also see slight improvement from 1H20 in the absence of temporary closures caused by strict lockdowns.
- We also note that Hong Kong is in talks to set up a travel bubble with Singapore while its Tourism Board is also pushing to reopen borders with Shenzhen before opening up to Greater Bay Area. The loosening of border with Greater Bay Area would provide a positive catalyst for the earnings outlook.
Supermarket sales remain strong when compared to pre-COVID days.
- We expect supermarket sales to continue to show an y-o-y growth in 2H20. Some restriction measures still prevail to support a demand for food at home though, this should taper down h-o-h in the absence of strict lockdowns in the region like those in 1H20.
- We note the announcement made by its Giant supermarket in Singapore to lower prices of 650 daily essential products by 20% on average, for 6 months. This could hint that Giant is getting better rebates from suppliers during this period as a result of higher sales volume.
- The ability to sustain its supermarket segment’s operating margin above 3% (2017-2019: 1-2%, 1H20: 5.3%) would be another a key rerating catalyst for Dairy Farm.
Attractive valuation.
- Trading at 17x FY21F P/E, we consider Dairy Farm’s valuation as undemanding compared to that of its Singapore-listed peer Sheng Siong (SGX:OV8) (23x FY21F P/E). Although we like Sheng Siong (see Sheng Siong Analyst Reports) for its much better margins and higher ROE profile, at current Dairy Farm share price, we think Dairy Farm’s risk-reward ratio looks favourable.
- See Dairy Farm Share Price; Dairy Farm Target Price; Dairy Farm Analyst Reports; Dairy Farm Dividend History; Dairy Farm Announcements; Dairy Farm Latest News.
- Maintain BUY and USD4.47 Target Price on Dairy Farm, c.20% upside and a 4% yield.
- A key downside risk is escalating social tensions in Hong Kong which could defer tourism recovery.
Juliana Cai
RHB Securities Research
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https://www.rhbinvest.com.sg/
2020-10-22
SGX Stock
Analyst Report
4.470
SAME
4.470
