DBS Group Research analyst Alfie Yeo continues to like Dairy Farm International (DFI) as he believes the group’s transformation towards an earning growth track is “well underway”.

“Some initiatives are already in place, enhancing earnings quality post-Covid,” he writes in a May 27 research note. He projects DFI will achieve earnings per share (EPS) CAGR of 30% over FY2020 ended December to FY2022.

Among the initiatives include plans by its 89%-owned Indonesian subsidiary Hero to phase out the Giant brand in Indonesia. Up to five Giant stores will be converted to the IKEA brand, with other Giant stores are to close by July. “As Hero’s Giant grocery retail business has been loss-making, culling back on exposure to this segment would reduce the earnings drag on our earnings forecast,” Yeo notes. 


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Given the expected absence of losses post-cessation of the Giant brand, his FY2022 earnings forecast has been raised by 15%.

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Despite the better earnings projected, Loh notes that this has been offset by a lower valuation on China grocery retailer Yonghui, in which DFI holds an 18% stake. “Our China consumer desk has recently turned less positive on Yonghui given low visibility on the industry’s near-term operating conditions,” he explains.

To that end, his target price for DFI has decreased from US$5.02 ($6.64) to $4.78.

Nonetheless, Loh remains upbeat on the stock and reiterates his ‘buy’ call. “We are above consensus for FY2021 earnings as we believe DFI’s multi-year transformation programme will take shape led by Covid-19 recovery,” he points out.

He believes the ongoing transformation for South Asia supermarkets will drive earnings and see a share price re-rating for DFI.


SEE:Dairy Farm International says overall performance in 1Q remains 'significantly affected' by Covid-19


“We see the current share price as attractive, trading at close to -1.5 SD of historical mean PE, 3.8% dividend yield, and well below peer average of >20 times FY20211-2022 PE,” he adds.

In terms of risks, Loh says a significant decline in earnings from other segments and a drop in valuations of Yonghui and Robinsons Retail Holdings would pose downside risks to his earnings forecast.

Shares in DFI closed up 4 US cents or 0.91% lower at US$4.36 on May 28.