RHB Group Research has downgraded Dairy Farm to “neutral” from “buy”, while analysts from DBS Group Research and CGS-CIMB have maintained “buy” or “add” on the supermarket convenience store operator following the release of its FY2020 results on March 11.

Dairy Farm, for the FY2020 ended December, posted 14% lower earnings of US$276 million ($371.4 million) compared to the US$321 million in FY2019, which was mainly attributable to the negative impact brought about by the Covid-19 pandemic.

Despite the downgrade, the Singapore research team at RHB has upped its target price estimate on Dairy Farm to US$4.78 from US$4.47.

The group’s FY2020 results came in higher than RHB’s expectations on the back of stronger-than-expected recovery in the 2HFY2020.


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


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Dairy Farm’s underlying PATMI – or earnings – stood 5% and 12% higher than the brokerage’s and street’s estimates respectively.

On that, the RHB team has raised its earnings estimates for the FY2021 and FY2022 by 4% to 8%. It has also introduced its earnings estimates for FY2023, which implies a 5% growth.

The brokerage’s new target price implies 21 times FY2021 price-to-earnings (P/E), above the stock’s five-year mean of 20 times.

“Looking forward, health & beauty (H&B) and the convenience store segments should see footfall pick-ups in view of Covid- 19’s containment and inoculation plans in progress,” note the team.

“That said, we believe most of the recovery prospects have been priced in, with the stock now trading at above its 5-year mean following a decent y-t-d run in share price,” it adds.

DBS analyst Alfie Yeo has, similarly, increased his target price estimate on Dairy Farm to US$5.02 from US$4.44 previously as the group’s FY2020 earnings performed above his expectations due to the higher-than-expected earnings from Dairy Farm’s associates and joint ventures.

Yeo also noted that the group’s final dividend of 11.5 US cents, which brought total FY2020 dividends to 16.5 US cents, stood above expectations as well.

On the back of the earnings outperformance, Yeo has raised his earnings forecast for FY2021 to FY2022 by 7% to 8% due to stronger outlook for its income from its associates and joint ventures, offset by a slightly lower operating margin outlook.

“We believe earnings recovery for Dairy Farm is in sight, with Covid-19 vaccines currently administered around the world,” he writes, believing the supermarket group to be “well-placed” for the recovery from the pandemic.

“Furthermore, we believe transformation plans that have initially been implemented will start to yield fruit in terms of better earnings quality going forward. As such, we believe earnings will recover over the next two years,” he adds.

In addition, Yeo remains positive on Dairy Farm’s long-term outlook due to the continued implementation of its transformation plan, driving value for its shareholders in the long run.

“Transformation initiatives are now gaining traction. These include the rollout of customer loyalty/rewards programmes, pricing campaigns, accelerating digital change, refreshing IT systems, investment in e-commerce, rollout of house brands, and relaunch of Giant in Singapore with enhanced value proposition,” he notes.

“Economies of scale will lower costs in Procurement, Category Management, People Development, Store Productivity, Supply Chain Optimisation and Business Process Re-engineering, driving shareholder value and earnings quality in the longer term,” he adds.

On his higher target price estimate, Yeo says this is “in line” with a stronger net profit outlook.

“We value Dairy Farm's core business at US$3.11 based on discounted cash flow, its 20% and 18% stakes in Yonghui and RRHI based on our target prices at US$2.01 and 36 US cents respectively, and net debt at 46 US cents per share.”

“Stock currently trades at 18.8 times FY2021 P/E, representing -1.5 standard deviation (s.d.) of its historical mean. Valuations remain compelling with core earnings priced at <10 times forward P/E. Maintain ‘buy’ for 11% upside including dividends,” he says.

Dairy Farm’s FY2020 net profit may have stood above CGS analyst Cezzane See’s expectations aided by government grants and Maxim’s associate earnings in the 2HFY2020. That said, she views the overall lower net profit as a “year to be forgotten” by the supermarket group due to the weaker health and beauty, and convenience segments due to the lack of tourists in Hong Kong and Macau for the former, and movement restrictions in Dairy Farm’s operational cities in the latter.

See has thus lowered her target price estimate to US$5.40 from US$5.50, still based on 22 times FY2022 P/E, close to -0.5 s.d. from its 13-year average mean. She has also lowered her earnings per share (EPS) estimates for the FY2021 and FY2022 by 2.5% and 1.9% respectively due to lower associate contribution.


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“We conservatively assume FY2021 net profit could still be lower than FY2019’s net profit of US$323.8 million as international borders have yet to open and movement controls may only be eased in 2HFY2021 with the wider roll-out of vaccines,” she writes.

However, she remains positive on the counter as its share price is still trading below its long-term average mean.

“We find Dairy Farm attractive for medium-term investors who are looking to revisit recovery plays and willing to ride out the volatilities of the stock (due to HK uncertainties; uneven recovery in Covid-19 cases and in its Southeast Asia business),” she says.

As at 4.36pm, shares in Dairy Farm are trading 8 US cents lower or 1.8% down at US$4.43 or 4.4 times price-to-book with a net dividend yield of 3.6% according to DBS’s estimates.