Dairy Farm International - CGS-CIMB Research 2021-03-12: Awaiting The Recovery Play

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

Dairy Farm International - Awaiting The Recovery Play

Dairy Farm's FY20 net profit was ahead at ~120%/114% of our/consensus’ forecasts; aided by higher 2H20 government grants and Maxim’s associate earnings.
While we pencil in 7% EPS growth in FY21F; we think it will still be lower than FY19’s EPS as Dairy Farm’s respective countries have yet to open their borders.
We reiterate our ADD call on Dairy Farm with a slightly lower target price of US$5.40, still based on 22x FY22F P/E as we view Dairy Farm as a medium-term recovery play.

Dairy Farm International (SGX:D01)’s FY20 group EBIT fell ~8.8% y-o-y despite being aided by government grants, rental rebates and good EBIT performance of its grocery retail ( > 300% y-o-y) and home furnishing segments (+65.1% y-o-y). This was largely due to significantly weak
1. health and beauty (-77.8% y-o-y) with the lack of tourists in HK and Macau, and
2. convenience segments (-30.7% y-o-y) due to movement restrictions in Dairy Farm’s operational cities.
FY20 contribution from associates was also down (-32.8% y-o-y), largely hit by Maxim’s restaurant business that incurred losses in 1H20 and saw full-year associate contribution shrink 55.7% y-o-y.
Dairy Farm's FY20 core net profit fell 14.1% y-o-y to US$275.7m.
A final dividend of US$0.115 was announced; taking Dairy Farm's FY20 full-year dividend to US$0.165 per share (-21.4% y-o-y).

Dairy Farm guided that it is in the 2nd phase of its multi-year transformation plan and believes that it is on track. Dairy Farm said that it is committed to
1. growing in China (it opened 200 7-11 convenience stores and has completed the optimisation plan for Mannings in FY20),
2. maintaining its HK strength (imputing demographic range optimisation plan for Mannings and improving fresh supply chain for the food business),
3. growing its IKEA franchise (2 new stores expected in Indonesia for FY21F);
4. refreshing the grocery retail business and developing a new format for health & beauty in South East Asia, and
5. driving digital innovation as e-commerce was more widely adopted in FY20.
We tweak our Dairy Farm's FY21-22F EPS forecasts by 1.9-2.5% on the back of lower associate contribution. We conservatively assume Dairy Farm's FY21F net profit could still be lower than FY19’s net profit of US$323.8m as international borders have yet to open and movement controls may only be eased in 2H21F with the wider roll-out of vaccines.

As Dairy Farm's share price is trading below its long-term average mean, we find Dairy Farm attractive for medium-term investors who are looking to revisit recovery plays and willing to ride out the volatilities of the stock (due to HK uncertainties; uneven recovery in COVID-19 cases and in its Southeast Asia business).
We reiterate our ADD call on Dairy Farm with a lower target price of US$5.40, still based on 22x FY22F P/E (close to -0.5 s.d. from its 13-year average mean).
See Dairy Farm Share Price; Dairy Farm Target Price; Dairy Farm Analyst Reports; Dairy Farm Dividend History; Dairy Farm Announcements; Dairy Farm Latest News.
Re-rating catalysts are a swifter-than-expected resolution to COVID-19; no reemergence of significant HK protests, better sales growth and margin expansion.
Downside risks are a slow resolution of COVID-19, continued HK protests, weaker sales/margins and lower dividend payouts.

Cezzane SEE CGS-CIMB Research | https://www.cgs-cimb.com 2021-03-12

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