Dairy Farm

DBS Group Research, Oct 1

DAIRY Farm (DFI) is a leading pan-Asian retailer, operating more than 5,600 supermarkets, hypermarkets, health and beauty stores, convenience stores and home furnishing stores. DFI offers exposure to rising Asian consumption as its retail operations are diversified across Asian markets, with different store formats targeting various consumer segments.

We like DFI for its defensive earnings and strong net cash generation. DFI has paid out more than 50 per cent of its earnings over the last five years at least. Net cash of US$420 million as of H1 2013 also provides a war chest to pursue inorganic growth opportunities.

We see a window of opportunity to accumulate on this counter. DFI has corrected by about 23 per cent from May 2013, more than Straits Times Index. Valuation is attractive at 25.5 times FY2014 forecast PE, below its last three years' average valuations.

We forecast DFI's revenue and earnings compounded annual growth rate to be 7 per cent and 8 per cent, respectively, for the next three years, driven by new store openings and 3 per cent SSSG (same store sales growth). Our discounted cash flow-based target price of US$11.60 implies a reasonable 29 times FY2014 forecast PE, below DFI's recent valuations of +1 standard deviation and 31 times forward PE since January 2012. We initiate coverage of DFI with a "buy" recommendation (target price: US$11.60).

BUY