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RHB sets new benchmark for Dairy Farm as HK moves into a new 'normal'

Samantha Chiew
Samantha Chiew10/22/2020 12:04 PM GMT+08  • 3 min read
RHB sets new benchmark for Dairy Farm as HK moves into a new 'normal'
This stock's valuations are "undemanding" and has a "favourable" risk-reward ratio
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RHB Group Research is keeping its “buy” recommendation on Dairy Farm with a target price of US$4.47 ($6.05).

In an Oct 22 report, analyst Juliana Cai says, “Hong Kong retail sales have remained fairly stable in July and August despite tightened restrictions during the period. We think this sets the new minimum benchmark for Hong Kong retail sales as tourism spending diminishes and locals decrease their discretionary spending.”

See also: Analysts mixed on Dairy Farm

As the Covid-19 situation in Hong Kong stabilises, Cai sees that retail sales should bottom-out from here. And with Dairy Farm’s large exposure to Hong Kong, it should see an improving risk-reward ratio at the current share price of US$3.76.

Industry sales for Hong Kong’s medicine and cosmetic category have been hovering between HK$1.5 billion ($262.2 million) to HK$1.7billion per month since March and have been registering an improving trend despite tightening restrictions in July and August.

“As such, we view this level of sales as a base line for the Health & Beauty (H&B) segment, in the absence of tourism spending,” says Cai, who also expects a better 2HFY2020 for Dairy Farm.

In its other markets – China, Singapore and Malaysia – Cai also expects h-o-h sales in 2HFY2020, as economic activities improve amid easing of restrictions. Operating margin should also see slight improvement from 1HFY2020 in the absence of temporary closures caused by strict lockdowns.

See also: Dairy Farm posts 35% drop in 1H earnings to US$115 mil on pandemic-related restrictions

“We also note that Hong Kong is in talks to set up a travel bubble with Singapore while its Tourism Board is also pushing to reopen borders with Shenzhen before opening up to Greater Bay Area. The loosening of the border with Greater Bay Area would provide a positive catalyst for the earnings outlook,” says Cai.

Meanwhile, panic buying at supermarkets is over, but sales still remain strong and the analyst expects supermarket sales to continue to show a y-o-y growth in 2HFY2020. Some restriction measures still prevail to support a demand for food at home though, this should taper down h-o-h in the absence of strict lockdowns in the region like those in 1HFY2020.

“We note the announcement made by its Giant supermarket in Singapore to lower prices of 650 daily essential products by 20% on average, for 6 months. This could hint that Giant is getting better rebates from suppliers during this period as a result of higher sales volume,” says Cai.

Overall, Cai deems the stock’s valuation as “undemanding” at 17 times FY2021 P/E, as compared to that of Sheng Siong (23 times FY2021 P/E). She has a “buy” call on Sheng Siong with a target price of $1.87.

“Although we like Sheng Siong for its much better margins and higher ROE profile, at current prices, we think Dairy Farm’s risk-reward ratio looks favourable. A key downside risk is escalating social tensions in Hong Kong which could deter tourism recovery,” adds Cai.

As at 12.05pm, shares in Dairy Farm are trading at US$3.76 or 19.7 times FY20 earnings with a dividend yield of 3.5%.

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