Dairy Farm International - DBS Research 2021-03-12: Well Placed To Tap On COVID Recovery

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

Dairy Farm International - Well Placed To Tap On COVID-19 Recovery

Dairy Farm's FY20 earnings above as associates/JV earnings outperformed.
Final dividend of US$0.115 declared, above expectations.
Raise Dairy Farm's FY21-22F earnings forecast by 7-8% led by post COVID-19 recovery.

Dairy Farm (SGX:D01)'s FY20 core earnings of US$276m (- 14% y-o-y) was above our US$249m projection, as associate/JV earnings outperformed. 2H20 revenue (US$5bn, -7.4% y-o-y) and operating profit (US$202m, - 0.1% y-o-y) were in line, with associate/JV recovering strongly to US$60m (+47% y-o-y) led by better than expected contribution from Maxims.
Final dividend of US$0.115 was declared, bringing Dairy Farm's total dividends for FY20 to US$0.165 per share, above expectations.

Dairy Farm's FY20 revenue declined by 8% y-o-y to US$10.3bn, dragged by lower footfall at Health & Beauty (- 35% y-o-y, US$2bn) and Convenience Stores (-3.9% y-o-y, US$2.1bn), offset by higher Grocery Retail (+3% y-o-y, US$5.3bn) and IKEA sales (+8.6% y-o-y, US$832m).
Health & Beauty was affected by lower tourists to Hong Kong and Macau. Convenience stores were affected by lower footfall due to lockdowns, while Grocery Retail and IKEA were beneficiaries of consumers staying home. EBIT margins were in line at 4%.

We believe Dairy Farm’s long term outlook remains positive. Although the COVID-19 pandemic has led to a decline in sales and earnings, FY20’s performance and dividends were better than expected. We see continued implementation of its transformation plan driving value for shareholders over the longer term.

These include the rollout of customer loyalty/rewards programmes, pricing campaigns, accelerating digital change, refreshing IT systems, investment in e-commerce, rollout of house brands, and relaunch of Giant in Singapore with enhanced value proposition. Improved product range, availability and freshness and new concept stores were also implemented at its upscale grocery retail stores.
In addition, programmes in joint sourcing, workflow enhancement, and management of joint facilities aim to improve efficiency. Economies of scale will lower costs in Procurement, Category Management, People Development, Store Productivity, Supply Chain Optimisation and Business Process Re-engineering, driving shareholder value and earnings quality in the longer term.

On the back of earnings outperformance, we are raising our Dairy Farm's earnings forecast for FY21-22F. This is largely due to stronger outlook for associates/JV income, offset by a slightly lower operating margin outlook, on lower ‘other income’ stemming from an absence of government grants from FY21F.
We believe earnings recovery for Dairy Farm is in sight, with COVID-19 vaccines currently administered around the world. Furthermore, we believe transformation plans that have initially been implemented will start to yield fruit in terms of better earnings quality going forward. As such, we believe Dairy Farm's earnings will recover over the next two years.

We raise our SOTP-based target price for Dairy Farm to US$5.02, in line with a stronger net profit outlook.
We value Dairy Farm's core business at US$3.11 based on DCF, its 20% and 18% stakes in Yonghui and RRHI based on our TPs at US$2.01 and US$0.36 respectively, and net debt at US$0.46 per share.
See Dairy Farm Share Price; Dairy Farm Target Price; Dairy Farm Analyst Reports; Dairy Farm Dividend History; Dairy Farm Announcements; Dairy Farm Latest News.
Dairy Farm currently trades at 18.8x FY21F P/E, representing -1.5 standard deviation of its historical mean. Valuations remain compelling with core earnings priced at < 10x forward P/E. Maintain BUY for 11% upside including dividends.

Alfie YEO DBS Group Research | https://www.dbsvickers.com/ 2021-03-12

SGX Stock Analyst Report BUY MAINTAIN BUY 5.02 UP 4.440