SINGAPORE (Mar 20): RHB Research is upgrading its call on Dairy Farm from “neutral” to “buy” despite lowering its target price to US$8.25 from US$8.64 previously with the view that long-term investors may look to accumulate the stock at its current low.

The research house’s move comes on the belief that Dairy Farm’s share price has hit its trough after plunging 19% in the year to date (YTD), underperforming the Straits Times Index (STI) considerably after the company made major write-downs and provisions to its supermarket/hypermarket division in 4Q18.

In a Wednesday report, analyst Juliana Cai says she deems Dairy Farm’s current valuations “interesting”, now that the stock is trading at a discount to its peer average of 23 times at 20 times P/E.

While the lowered FY19F-21F earnings by 4-6% to account for further expenses to lower consumer prices as well as revitalise Dairy Farm’s Giant-branded stores, she expects core PATMI to grow at 11% CAGR over the next three years.

In Cai’s view, FY19F EBIT could see some respite from reduced opex after recording a US$453 million one-off charge in FY18 out of which US$83 million was attributed to “onerous lease provisions”.

“While there is no fast turnaround for its supermarket/hypermarket division, we note that work is in progress to right-size the business as well as improve prices, offerings and presentation,” comments Cai, who notes that Dairy Farm’s major turnover of its management team has prompted restructuring action to address legacy issues within the food business division.  

In particular, the analyst believes contributions from Dairy Farm’s 20% stake in Robinson Retail Holdings could contribute an additional US$20 million to the company’s FY19F earnings.

The recently-acquired chain of Yonghui Superstores could add another US$20 million to Dairy Farm’s share of associates in FY19, considering how only nine months of the chain’s contributions were recorded in FY18.

“We believe near-term growth could still be driven by higher contributions from its health & beauty division and strong associates, while home furnishing is likely to see higher revenue offset by pre-opening costs for new stores,” concludes Cai.  

As at 11.08am, shares in Dairy Farm are trading 0.94% higher at US$7.48 or 5.95 times Dec 19F book value.