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 ($6.92), 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 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 says.

Loh says Dairy Farm’s diversified businesses and markets make its portfolio resilient and defensive. Despite Covid-19 negatively affected gross margins for its health and beauty and convenience store segments, Loh says that higher margins from its home furnishings and grocery retail segments mitigated the impact, resulting in FY2020 ended December operating profit dropping “only” 9% y-o-y to US$388 million.


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Dairy Farm’s roster of brands includes brick-and-mortar stores Cold Storage, Wellcome, Giant, Hero, Mannings and Guardian. Loh also notes that the group’s 50% stake in Maxim’s has key franchises such as Shake Shack and Starbucks, while its supermarket house brand Maxim which produces food and packaged snacks is increasing in popularity among consumers.

Loh highlights that the strong brands underpin Dairy Farm’s stable revenue stream, which he estimates 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 Loh expects gross margins to decline slightly for FY2021 to 30.5% from 31.1% in FY2020, EBIT is forecasted to rebound by 8% y-o-y to US$420 million.

Loh 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 rising from 5% - 7% in 2014 - 2017 to 11% - 13% in 2018 - 2020.

Looking beyond 2021, 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.


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


Loh’s target price of US$5.19 is pegged to its five-year 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, in our view, undervalues: a) the company’s stable platform as regional economies recover, and b) its earnings growth over the next two to three years as its growth strategies pay off,” he adds.

As at 11.26am, shares in Dairy Farm are up 1 US cents or 0.24% higher at US$4.23.