CGS-CIMB Research is upgrading its call on Dairy Farm International (DFI) to “add” from “hold” but with a lower target price of US$4.50 from US$4.63 previously, as the stock is “back at palatable valuations”, especially for longer-term investors.

In a September 9 report, analyst Cezzane See says, “We stayed neutral post-DFI’s last results, on concerns of HK’s 2H20 prospects, but with its share price correcting by some 7% since our last report on July 30 (trending closer to its YTD trough share price of US$3.70) and forward valuations now at about 17.2 times FY21 P/E [closer to 1.5 standard deviation (SD) below its historical mean], we believe the near-term uncertainties are priced in.”

With an upside potential of 16.9% to the 12-month target price of US$4.50 (still based on 20 times FY21 P/E, close to -1 SD from its 13-year average mean), valuations seem favourable for longer-term investors who are looking to revisit recovery plays and willing to ride out the volatilities of the stock (due to HK uncertainties and uneven recovery in SEA markets).

In July, HK retail sales were still lower y-o-y, contracting by 23.1%. But the rate of decline has been reducing on a mom basis since March.

Interestingly, the medicine and cosmetic sales in HK saw an improvement, as the declination narrowed to 50.9% y-o-y, from June’s 57.7% y-o-y decline, despite a still negligible number of China visitors to HK.

Recently, the number of Covid-19 cases in HK has also decreased and post the completion of the Universal Community Testing Programme (UCTP) for Covid-19, which is scheduled for September 11, this could mean a gradual relaxation of cross-border travel within the Greater Bay Area. This bodes well for HK’s services sector.

Nonetheless, the analyst is positive on the stock despite expecting a slow full-on recovery as its valuations are increasingly palatable.

With HK tightening restrictions in mid-July to August, See expects 3Q20 earnings to be affected and hence has trimmed FY20-22 EPS by 2.1-4.6%. “We forecast FY20 EPS to fall about 29% y-o-y, and FY21 to still be below FY19’s EPS despite an approximated 2% y-o-y growth,” she says.

And even with the earnings cut, forward valuations are still below the stock’s average 13-year mean of 25.8 times and below regional peers’ forward P/E of about 21 times.

“We have pegged DFI’s TP close to its -1 SD from its long-term average (19.5 times) to account for the medium-term uncertainties (social unrest, no definite date of border opening in HK and uneven recovery in SEA markets),” says See.

As at 11.20am, shares in Dairy Farm are trading 2.3% higher at US$3.94 or about 4.4 times FY20 book with a dividend yield of 4.2%.


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