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Dairy Farm International - UOB Kay Hian 2021-04-16: On Track For A Slow & Steady Recovery Despite Market Volatility

DAIRY FARM INT'L HOLDINGS LTD (SGX:D01) | SGinvestors.io DAIRY FARM INT'L HOLDINGS LTD (SGX:D01)

Dairy Farm International - On Track For A Slow & Steady Recovery Despite Market Volatility

  • Dairy Farm International is a play on Asia’s developed and emerging markets with upside from the rising consumer spending power of its middle class. Its multi-year strategic transformation starting in 2018 has led to higher EBITDA margins which we expect the company to maintain.
  • Via its 50% interest in Maxim’s which has key franchises such as Shake Shack and Starbucks, Dairy Farm has products that appeal to all ages.
  • We initiate coverage on Dairy Farm with a BUY and PE-based target price of US$5.19 implying 23% upside with a 5% yield.



INITIATE COVERAGE ON DAIRY FARM INTERNATIONAL (SGX:D01)


Benefits of diversification.

  • We like Dairy Farm International (SGX:D01)'s position as the largest retailer in Asia ex-Japan with its strong market presence in China, Hong Kong, Taiwan, India and ASEAN giving it exposure to both developed and emerging markets.
  • Dairy Farm’s regional scale and different divisions give it a highly resilient and defensive portfolio. This was seen in 2020 when COVID-19 led to gross-margin contraction at its health & beauty and convenience stores segments but this was mostly offset by higher margins from both home furnishings and grocery retail. As a result, operating profit for 2020 declined by only 9% y-o-y to US$388m.

Structural transformation should result in long-term growth.

  • In 2018, Dairy Farm started a structural transformation programme that has already seen financial benefits flow through to the bottom-line, with EBITDA margins rising from 5-7% in 2014-17 to 11-13% in 2018-20. As regional economies reopen, assuming the continued successful distribution of COVID-19 vaccines, Dairy Farm should benefit from its considerable brick-and-mortar presence.

Strong household brands are prevalent in various countries, underpinning a stable revenue stream.

  • Dairy Farm’s brick-and-mortar stores − including Wellcome, Cold Storage, Giant, Hero, Mannings and Guardian − are household names in several countries. With COVID-19 vaccination programmes underway in many countries in Asia, domestic consumption recovery is likely to continue. In addition, Dairy Farm’s first exclusive house brand, Meadows, enjoys rising popularity among consumers.


STOCK IMPACT


Large and diverse brand portfolio allows Dairy Farm synergies and economies of scale

  • Dairy Farm owns many brands that target distinct market sections across different consumer segments in various Asian markets. These include Greater China, Indonesia, Laos, the Philippines, Singapore, Taiwan, Thailand and Vietnam. Despite this diversification of products, Dairy Farm has managed to synergise their differing services through JVs to leverage on greater economies of scale, thus enhancing efficiency and reducing overall cost of production. This can be seen in their long-term gross margin which has expanded slightly by about 2bp over the past 10 years.
  • We forecast that Dairy Farm will be able to maintain its low-teens EBITDA margin in 2021-23.

Strong household brands are prevalent and prominent in various countries, underpinning a stable revenue stream.

  • Dairy Farm’s brick-and-mortar stores are household names in several countries. With COVID-19 vaccination programmes well underway in many countries in Asia, domestic consumption recovery will likely continue.
  • In addition, Dairy Farm’s Meadows brand, the company’s first exclusive house brand which encompasses products ranging from fresh produce to packaged snacks, is both affordable and of better quality than its predecessors. This has earned the brand a rising spot in popularity of supermarket brands among consumers.

Top-line expected to remain stable with upside potential for profits.

  • We expect Dairy Farm's 2021 revenue to grow 2% y-o-y after recording an 8% y-o-y drop in 2020 due to COVID-19. In 2021, we expect revenue and more importantly EBIT to rebound by 2% and 8% y-o-y respectively to US$10.48b and US$420m respectively.
  • For 2022 and 2023, we assume slower top-line growth of 1.6% and 1.4% respectively, in tandem with the post-COVID-19 recovery in Asia.

Gross margins conservatively expected to contract slightly in the forecast years.

  • In 2020, Dairy Farm experienced gross margin contraction at its health & beauty and convenience stores segments. This was mostly offset by higher margins from home furnishings and most importantly grocery retail, which resulted in overall gross margin contracting only 0.5ppt y-o-y to 31.1% in 2020.
  • Going forward, we forecast gross margins to decline slightly to 30.5% in 2021 and then stabilise at just over 27% from 2022 onwards. We highlight that the average gross margin over 2015-19 was 30.6% and thus our forecasts have purposely been conservative given the lack of guidance from the company.


VALUATION & RECOMMENDATION

Initiate coverage on Dairy Farm with BUY and PE-based target price of US$5.19.

  • We initiate coverage on Dairy Farm with a BUY recommendation and a target price of US$5.19, implying 23% upside from current levels. This excludes a forecast yield of nearly 5% for 2021 based on its closing price of US$4.22 (as at 16 Apr 21). We peg our 2021F earnings per share forecast to its 5-year average P/E of 22x. Dairy Farm’s P/E is 1 standard deviation below this 5-year average which, in our view, undervalues:
    1. the company’s stable platform as regional economies recover, and
    2. its earnings growth over the next 2-3 years as its growth strategies pay off.
  • Over the 2020-23 period, we forecast a net profit CAGR of 6.8%.
  • Risks to our call include the underlying social unease in Hong Kong and the potentially uneven pace of recovery in Southeast Asia.
  • See

Inexpensive based on P/B.

  • We highlight that Dairy Farm trades at 1 standard deviation below its five-year average P/B of 5.7x. As a “sanity check”, we note that at our target price of US$5.19, Dairy Farm would trade at a price-to-tangible book value of 5.0x which we deem to be fair relative to its trading history.

See the 19-page coverage initiation report attached below for complete analysis on Dairy Farm International (SGX:D01)






Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-04-16
SGX Stock Analyst Report BUY INITIATE BUY 5.19 SAME 5.19



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