Dairy Farm International

DBS Group Research, March 10

FY2013's core earnings of US$480 million (+6 per cent y-o-y) were slightly ahead of our expectations due to lower-than-expected operating expenditure (opex). Otherwise, revenue and gross margins were in line with expectations. FY2013 earnings were driven by store expansion and generally better SSSG (same-store sales growth).

While underlying profit in the Food Business declined, Health & Beauty, Home Furnishing and Restaurant segments reported record profits. Balance sheet improved with a stronger net cash position of US$638 million. Final dividend per share (DPS) of 16.50 US cents was declared, bringing total DPS for FY2013 to 23 US cents.

Management continues to be Asia-focused, and will expand to attractive markets and business segments while seeking to attain better operating efficiencies. Going forward, we believe it will increase store count mainly in Indonesia and China. It will also invest in IT systems to enhance efficiencies.

FY2014 forecast earnings are revised by +14 per cent. We lift Ebit (earnings before interest and tax) margins from 4.4 per cent to 5.1 per cent as our opex and margin estimates were conservative previously. We now expect pre-exceptional earnings to grow at 9 per cent this year, largely driven by store expansion, SSSG and margin expansion on better sales mix.

Our DCF-based (discounted cash flow) target price is raised to US$10.07 on higher earnings, implying a forward PE of 26.4 times, within +0.25 standard deviation from its past five years' average PE valuation of 25.5 times. Dairy Farm currently trades below its historical five-year average PE of 25.5 times.

Coupled with our projected 9 per cent EPS growth in FY2014 forecast, and strong balance sheet to pursue inorganic growth, and geographical diversity, we upgrade the counter to "buy" on potential return of 10 per cent.

BUY