We upgrade Dairy Farm to BUY (from Neutral), with lower DCF-derived TP of USD7.80. While we are cognizant of ongoing challenges in its operating environment this year, our contrarian call is premised on taking a longer-term view on the company, which has a track record of steady growth. In the meantime, dividends should cushion the possibility of share price weakness. Investment into Yonghui could bring about more meaningful entry into China.
■ Results dragged down by ASEAN this year
We expect net profit to decline 9% for FY15, despite higher revenue of 5%. This is largely due to margin erosions in its ASEAN markets, which are experiencing consumption weakness. This is compounded by the fact that Dairy Farm’s headquarter costs and reporting currency are in USD, which has appreciated significantly against many regional currencies. Company performance remains resilient in North Asia, especially Hong Kong.
■ Latent potential in retail giant
We believe the company’s ongoing initiative to drive organization-wide business synergies will produce gains over the medium term. This remains on track, including standardization of back-end supply chains and IT systems, more private label products and introduction of new fresh food distribution centres in Singapore and Malaysia. Ongoing investment in Yonghui Superstores (601933 CH, NR)) will provide a platform to grow further into China.
■ Dividends likely to continue
Dairy Farm has consistently paid out a dividend at least equal to the year before, even throughout each financial crisis. Since 2008, dividend has been at least 23 US cents per share and we do not expect this to decline going forward, even following its biggest investment-to-date in Yonghui. This dividend payout is only an estimated 40% of annual operating cashflow.
■ Upgrade to BUY
The company has a track record of growth over the longer term and profit has declined YoY only on two occasions since 2006. We believe the current weakness offers a long-term opportunity for shareholders and upgrade the stock to BUY. After adjusting FY15FFY17F earnings by 4-11%, our new DCF-derived TP is USD7.80 (vs USD9.10), implying FY16F P/E of 21x. The main risk to our forecasts is prolonged consumption weakness in key markets such as Malaysia and Indonesia. (Read Report)
Source : RHB Research