UOB Kay Hian analyst Adrian Loh believes that despite margin pressures impacting Dairy Farm International (DFI) in 2021, “incrementally positive newsflow” should benefit the company in the medium term.
This includes higher vaccination numbers in DFI’s markets like Hong Kong, Indonesia, Malaysia, Singapore and Thailand as well as in China. “With an increasing number of Asia’s population obtaining the first and second doses of vaccines, we expect a gradual reopening of economies over the next three to six months,” Loh says. He expects this to boost both domestic and tourism-related spending.
See also: RHB lowers TP for Dairy Farm International following sharper-than-expected dip in grocery earnings
Citing Bloomberg consensus forecasts, he notes that 2021 growth estimates for Hong Kong and Singapore have been raised by 0.7 percentage points and 20 basis points respectively, though Indonesia and Thailand have seen forecast downgrades by their respective governments.
Loh also believes newsflow on travel opening up between Hong Kong and China will impact DFI positively. Earlier this week, the Hong Kong government stated that it will allow quarantine-free entry for up to a total of 2,000 residents from mainland China and Macau each day, subject to certain requirements such as a negative Covid-19 test prior to arrival.
“While visitors would have to undergo 14 days of quarantine upon their return to the mainland or Macau, thus deterring day tourists, we nevertheless view such developments as incrementally positive for Hong Kong’s overall retail sales, thus benefiting DFI’s Mannings business,” Loh explains.
Retail spending in Hong Kong also appears to have stabilised, with sales rising 3% y-o-y in July. The government's HK$5,000 ($864) consumption voucher is expected to further boost spending in the third quarter. “While y-o-y comparables for 2021’s supermarket sales will remain challenging due to the high base effect of the panic-buying in 2020, we note that average sales for 2021 have reverted to pre-Covid-19 numbers,” Loh adds.
Given the positive developments, Loh has kept his “buy” rating and target price of US$4.53 for DFI unchanged. His target price is pegged to a P/E target multiple of 24.7 times, which is one standard deviation below its five-year average.
“We believe that the discount to its average P/E is fair and reasonable given the continued Covid-19-related challenges that the company faces in its various business segments and geographies,” Loh remarks.
“As the region progresses towards having a greater proportion of its population vaccinated, and further evidence of DFI’s business transformation surfaces in the near to medium-term reporting periods, we expect DFI to trade at higher multiples compared with the present,” he adds.
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As at 1.32pm, shares in DFI are trading up 2 cents or 0.56% higher at US$3.62.
Photo: Bloomberg
