SINGAPORE (Mar 28): DBS Group Research is raising Dairy Farm International's target price by 23 US cents to US$9.77.
This follows a deal by Dairy Farm's wholly-owned Rustan Supercentres to partner PSE-listed Robinsons Retail Holdings Inc. (RRHI) to build a leading food retail business in the Philippines.
In exchange, Dairy Farm will take an 18% stake in RRHI.
"Reiterate 'buy' as we turn more positive on partnership deal with RRHI," says analyst Alfie Yeo adding that swapping Rustan's loss-making business into shares of RRHI presents upside to both earnings and target price.
"We see earnings turnaround going forward as a stock catalyst and swapping Rustan for RRHI shares is part of this process," says Yeo, "We believe successful implementation of strategies by new CEO Ian McLeod will be key to earnings recovery."
Excluding Yonghui and RRHI, Dairy Farm's core business is just 16 times forward earnings, below the regional peers’ average and its nine-year historical average 24 times forward earnings.
Yeo is positive that new CEO Ian McLeod and his initiatives to improve performances of the stores will pay off over the next few years.
Already, more emphasis is being placed on store operations on a more detailed basis including merchandising to display, sourcing, pricing space management and cost management.
McLeod also has a track record of turning around Coles in Australia.
DBS's target price of US$9.77 is derived from sum-of-parts valuation methodology.
The research house is valuing Dairy Farm's core business at US$7.72 based on DCF, 20% and 18% stakes in Yonghui and RRHI based on the market values at US$2.28 and US$0.31 respectively; and higher net debt at US$0.54 per share post financing of its 6.1% stake in RRHI.
As at 10.42am, shares in Dairy Farm are trading at US$8.00 or 20.8 times FY18 earnings.
