DAIRY FARM INT'L HOLDINGS LTD (SGX:D01)
Dairy Farm International - Cessation Of Giant Brand In Indonesia Is Earnings Accretive
- PT Hero to convert Hypermarket stores to IKEA by July 2021.
- Expect positive earnings uplift as PT Hero is currently loss making.
- Raise Dairy Farm International's FY22F core earnings forecast by 15%.
- Maintain BUY with lower target price US$4.78 as stronger core business offset by lower Yonghui valuation.
Positive on PT Hero’s restructuring
PT Hero to convert/cease Giant brand July 2021.
- Dairy Farm International (SGX:D01) has announced that PT Hero will be pivoting away from the Giant brand and will concentrate on investing into stronger brands of IKEA, Guardian and Hero Supermarket. Dairy Farm International will convert up to five Giant stores to the IKEA brand while the remaining Giant stores will be closed by end of July 2021. The possibility of converting some Giant stores into Hero Supermarkets is also being evaluated.
Most of PT Hero’s earnings contribution would be from the Food business.
- PT Hero is 89% owned by Dairy Farm International. PT Hero reported revenue of Rp8,894bn in FY20, contributing US$620m or 6% of Dairy Farm International’s FY20 revenue. FY20 net losses were Rp1,215b, a drag of US$75m or 28% to FY20 net profit after minority interest. As of end-FY20, PT Hero had 115 grocery retail outlets, 314 Health & Beauty outlets and 2 IKEA outlets.
- Net assets of PT Hero’s Food business is Rp1,855b (US$129m, 8.5% of Dairy Farm International’s FY20 net assets after minority interest).
Absence of loss-making business in FY22F to lift overall earnings.
- As PT Hero’s Giant grocery retail business has been loss making, culling back on exposure to this segment would reduce the earnings drag on our earnings forecast. Based on our understanding of PT Hero’s FY20 earnings, pre-tax losses of about Rp1,027b (US$72m) was mainly contributed by the Food business. Hence our forecast of FY22F’s pre-tax profit should theoretically increase by this magnitude after accounting for the absence of earnings drag.
- FY21F earnings remains largely unchanged due to restructuring costs incurred. As a result of the adjustments, our earnings forecast for Dairy Farm International in FY21F is largely unchanged while our earnings forecast for FY22F is raised by ~15%.
Maintain BUY on Dairy Farm International, with a lower target price of S$4.78.
- While the development at its Indonesian operations is positive for the valuation of Dairy Farm International’s core business, our target price for Dairy Farm International is lower, largely affected by a lower target price on Yonghui. Our China consumer desk has recently turned less positive on Yonghui given low visibility on the industry’s near-term operating conditions. Nonetheless, our new US$4.78 target price for Dairy Farm International along with dividend yield of > 3% offers 11% upside.
- See
- We continue to like Dairy Farm International as we are confident of its re-rating as it executes on its transformation plan. Current Dairy Farm's Share Price attractively values its core business at < 10x P/E.
Alfie YEO
DBS Group Research
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https://www.dbsvickers.com/
2021-05-27
SGX Stock
Analyst Report
4.78
DOWN
5.020
