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CGS-CIMB upgrades Dairy Farm to 'hold', as its main markets emerge from Covid-19-induced lockdowns

Felicia Tan
Felicia Tan6/10/2020 12:16 PM GMT+08  • 2 min read
CGS-CIMB upgrades Dairy Farm to 'hold', as its main markets emerge from Covid-19-induced lockdowns
As most markets are now emerging from the Covid-19-induced lockdowns, Dairy Farm International’s near-term prospects are looking better, according to CGS-CIMB analyst Cezzane See.
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SINGAPORE (June 10): As most markets are now emerging from the Covid-19-induced lockdowns, Dairy Farm International’s near-term prospects are looking better, according to CGS-CIMB analyst Cezzane See.

As such, she has upgraded Dairy Farm International to “hold” from “reduce”, and raised its target price to US$5.45 from US$4.38, previously. The new target price represents a 9.0% upside on the counter.

See has raised Dairy Farm’s price-to-earnings ratio (P/E ratio) to 20x FY21F earnings per share (EPS) from some 17x.

She has also raised 20FY21-22 earnings per share (EPS) estimates by 4.5%-5.3% on higher earnings before interest and taxes (EBIT) margins for most of its formats and restaurant businesses. She has left the health and beauty forecasts unchanged due to medium-term risks from lower tourist visitations in Hong Kong.

“We would turn more positive on the stock on a meaningful recovery in Hong Kong’s economic conditions (amid sporadic ongoing protests) and tourist arrivals, especially from China (down 54% y-o-y in Jan 20, i.e. pre-Covid-19 outbreak, and 99% y-o-y in Apr 20),” says See, as she sees Chinese visitors from the mainland as a key driver of Dairy Farm’s Hong Kong health and beauty segment, North Asia sales, and EBIT growth.

Previously, Dairy Farm’s weak 1Q20 interim update prompted the brokerage to remain negative on the company due to near-term uncertainties on its convenience stores and restaurants in North Asia. The brokerage has since “priced in” Dairy Farm’s negatives, and urges investors to “await the recovery”.

Dairy Farm has also announced its careful management of its capex and working capital, as well as a sales agreement to divest 100% of Wellcome Taiwan to Carrefour in June.

“We think all these are steps to preserve its cash position. As such, its FY20F DPS of US$0.21 should be intact, which at today’s close implies a dividend yield of 4.4%,” See adds.

As at 12.11pm, shares in Dairy Farm International are changing hands 0.6% up at US$5.03 (S$6.99).

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