SINGAPORE (Sept 27): Phillip Capital is initiating coverage of Dairy Farm International at “buy” with a target price of US$9.89 ($13.41), given the Pan-Asian retailer is a proxy to the North Asian consumer boom.
The research house is forecasting a dividend per share (DPS) of 22 US cents for FY17, representing a total return of 35.1% based on the counter’s last closing price of US$7.48.
In a Wednesday initiation report, analyst Soh Lin Sin expects Dairy Farm’s margins to expand in the next few years from a better sales mix of higher margin products in the categories of higher fresh food, more corporate brand items, expansion into the upscale market, as well as an increase in ready-to-eat products – all of which currently still lack competitors.
Soh also sees more economies of scale for the group with its establishment of distribution centres in key countries to enhance its bulk handling efficiencies, as well as the implementation of its group-wide merchandising system to inventory management.
Streamlining its supply chain and increasing direct sourcing across and companies within its group would also contribute to the group’s economies of scale, she adds.
With Dairy Farm’s 7-Eleven store count in Guangdong on track to grow by 10% per annum by end FY18, the analyst believes it has the potential to double its footing in Hong Kong given Guangdong’s vast population base.
Additionally, Soh believes the group’s fast-growing associates Yonghui and Maxim would help to boost the group’s profit contribution from its associates to grow 24-8% in FY17-18E. She sees its associates’ average earnings growth to come in at around 17% per annum in FY17-18E.
Key risks to Phillip Capital’s view include intensifying competition and increasing operating costs, regulatory risks in operating countries, and unfavourable exchange rate movements, among others.
As at 2.32pm, shares in Dairy Farm are trading 7 US cents higher at US$7.55, 5.75 times FY17 book value.
