Upside from Asia’s rising consumption power

UOB Kay Hian Research analyst Adrian Loh has initiated coverage on Dairy Farm International Holdings with a “buy” rating and a target price of US$5.19 ($6.89), implying 23% upside from current levels.

In a research note dated April 19, Loh says that Dairy Farm is a play on Asia’s developed and emerging markets, with an upside from the rising consumer spending power of its middle class.

“We like Dairy Farm’s position as the largest retailer in Asia ex-Japan with its strong market presence in China, Hong Kong, Taiwan, India and Asean giving it exposure to both developed and emerging markets”, he writes.

Dairy Farm’s diversified businesses and markets make its portfolio resilient and defensive, Loh adds.

Dairy Farm’s roster includes Cold Storage, Giant and Guardian as well as franchises like Starbucks, which it holds through its 50% stake in Maxim.

Despite Covid-19 negatively affecting gross margins for its health and beauty and convenience store segments, the higher margins from its home furnishings and grocery retail sectors mitigated the impact, resulting in FY2020 ended December 2020 operating profit dropping “only” 9% y-o-y to US$388 million.

Loh estimates Dairy Farm’s revenue will grow 2% y-o-y in FY2021 to US$10.48 billion, driven by domestic consumption recovery as vaccination programs continue rolling out, while ebit is forecasted to grow 8% y-o-y to US$420 million.

He is bullish on Dairy Farm’s long-term growth, driven by its ongoing structural transformation programme which began in 2018.

The analyst says that the programme has seen ebitda margins rise from 5% to 7% between 2014 to 2017 to 11% to 13% between 2018 to 2020.

Looking further ahead, he expects slightly slower revenue growth of 1.6% and 1.4% for 2022 and 2023, in tandem with post-pandemic recovery in Asia. Gross margins are also expected to contract and stabilise at 27% from 2022 onwards.

“Our [gross margin] forecasts have purposely been conservative given the lack of guidance from the company,” he adds.

Loh’s target price of US$5.19 is pegged to its fiveyear average P/E of 22 times. It excludes a forecast yield of nearly 5% for FY2021 based on its closing price of US$4.22 (as at April 16).

Dairy Farm’s P/E is one standard deviation below the five-year average which Loh says undervalues the company’s stable platform as regional economies recover and its earnings growth prospects