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

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

Dairy Farm International

CIMB Research, July 22

NEWSWIRES reported that Hutchison is considering selling its Parknshop supermarket chain. Several sales figures have been bandied around, including US$2 billion from Bloomberg. In 2012, ParknShop generated HK$21.7 billion (US$2.8 billion or S$3.5 billion) revenue and we estimate that it yielded HK$1.5 billion Ebitda. Hence, US$2 billion values ParknShop at 10 times trailing EV/Ebitda. In comparison, Big C paid 13 times for Carrefour Thailand and we estimate that Aeon bought Carrefour Malaysia for 11 times.

We think that the sale does not necessarily imply poorer prospects for Hong Kong's grocery retail market. In fact, we think that the market could even be more vibrant than its fellow Asian tiger, Singapore. As gleaned from Hutchison's retail, others and manufacturing segment (ParknShop contributes about 60 per cent of turnover), this segment reported revenue and Ebitda growth of 6 per cent as well as SSSG (same store sales growth) of 5.6 per cent for FY2012. This trend ties in with Dairy Farm's strong Hong Kong performance. Headwinds for ParknShop stem from China (not a large part of the ParknShop business), with the banner reporting declines in revenue and Ebitda. Again, this ties in with Dairy Farm's perspective. China has been a difficult market to operate in and the group does not have a grocery retail presence in China.

Lastly, the potential sale will give some sense of valuations for Dairy Farm's Wellcome chain. That said, it is generally accepted that Dairy Farm's valuations are rich. We expect the scarcity premium to persist, and rightly so.

We continue to rate Dairy Farm an "outperform", given its market leadership in Hong Kong and Singapore as well as its firm foothold in Asean emerging markets. We see no reason to change our EPS and residual-based target price of US$13.55 for Dairy Farm, which implies 29 times 2014 PE and 13 times 2013 P/B.

OUTPERFORM