Dairy Farm - CGS-CIMB Research 2021-01-07: Still Attractively Priced For The Medium-Term; Reiterate ADD With Higher Target Price


Dairy Farm - Still Attractively Priced For The Medium-Term

  • Various Hong Kong retail sales categories saw m-o-m improvements in Nov 20 despite still declining y-o-y.
  • Dairy Farm’s valuation looks attractive to us and is still below long-term average. We expect earnings to improve as a COVID-19 vaccine emerges in FY21.
  • We reiterate our ADD call on Dairy Farm with a higher target price based on 22x P/E (previously 19.5x) and after rolling forward valuation to FY22.

Various Hong Kong retail statistics improved m-o-m in Nov 20

  • Hong Kong Census and Statistics Department provisional estimates show Hong Kong retail sales continuing to recover on a m-o-m basis in Nov 20, despite still being down ~4% y-o-y (vs Oct 20: -8.7% y-o-y) as COVID-19 still hurts Hong Kong. Supermarket sales rose ~1.6% y-o-y in Nov 20; while furniture and fixtures jumped ~15% y-o-y. Hong Kong medicine and cosmetic sales declined ~34.8% y-o-y in Nov 20 (vs ~39.4% y-o-y decline in Oct 20), despite a negligible number of China visitors to Hong Kong (down almost 100% y-o-y ).
  • We see the m-o-m improvement as encouraging; and even though Hong Kong is facing its fourth COVID-19 wave, we think an earnings recovery is intact as a COVID-19 vaccine emerges in FY21F.

Recovery in FY21 largely from associate earnings

  • While Dairy Farm (SGX:D01)’s supermarket margins could moderate in FY21F (as the world recovers); we have factored in improved margins for Dairy Farm’s convenience and health and beauty segments as footfall recovers across Dairy Farm’s markets.
  • Despite a slight decline in FY21F EBIT, we still project a ~32% net profit growth for Dairy Farm in FY21 due to recovery in its 50% owned restaurant business – Maxim’s (which we expect to see losses in FY20F) and sustained associate earnings (mainly from Yonghui and Robinsons). This should lift Dairy Farm's FY21F associate earnings by 2.5x.

Valuations still attractive

  • Dairy Farm's share price is still down ~26% y-o-y despite optimism that a vaccine could aid a global economic recovery; including Dairy Farm’s revenue recovery. It now trades at ~19x FY21F P/E; close to -1 s.d. from its 2007-19 average mean. Hence, we believe that most of the near-term uncertainties are priced-in.

Reiterate ADD on Dairy Farm

  • We fine-tune our forecasts for housekeeping purposes. We find Dairy Farm attractive 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; uneven recovery in COVID-19 cases and in its Southeast Asia business).
  • 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 reiterate our ADD call with a higher target price based on higher P/E of 22x (close to -0.5 s.d. from its 13-year average mean) but rolled-forward valuations to FY22.
  • Re-rating catalysts are a swifter-than-expected resolution to COVID-19; no reemergence of significant Hong Kong protests, better sales growth and margin expansion.
  • Downside risks are a slow resolution of COVID-19; continued Hong Kong protests, weaker sales/margins and lower dividend payouts.

Cezzane SEE CGS-CIMB Research | https://www.cgs-cimb.com 2021-01-07
SGX Stock Analyst Report ADD MAINTAIN ADD 4.500 SAME 4.500