UOB Kay Hian analyst Adrian Loh has kept “buy” on Dairy Farm International (DFI) as he sees some positivity in the group’s retail sales in Hong Kong, as well as y-o-y sales growths in its food and beverage (F&B) associate Maxim in the 3QFY2021.
That said, Loh has lowered the counter’s target price to US$3.60 ($4.92) from US$4.53 previously due to the “underwhelming” performance seen in 2021.
While the group reported positive figures in FY2020 due to the panic spending and government support, it had a “tough act” to follow in FY2021 following the previous year’s high base.
In FY2021, the group’s key associate Yonghui was negatively affected by increased levels of competition in China.
“Positive y-o-y performances from some of its segments do not appear to be able to rescue its 2021 numbers,” add Loh.
In its business update for the 3QFY2021, DFI’s results stood “weaker than expected”.
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Its associates, Maxim and Yonghui, performed better on a y-o-y basis, although the competition in China has “materially degraded” Yonghui’s margins. Management has also not guided as to when this will turn around.
On the negative end, DFI’s grocery, health and beauty, as well as home furnishings declined y-o-y.
Hong Kong’s closed borders also remain an issue in terms of seeing a return to business-as-usual, especially for its health and beauty segment, notes Loh.
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On this, Loh believes DFI’s anticipated poor performance for the FY2021 should be already priced in.
“With consensus having already downgraded earnings by over 50% in the past 3-4 months, and earnings likely to trough in 2021 in our view, we expect DFI’s share price to re-rate in the next few months once the 2022 earnings growth comes into view,” he writes in a Dec 8 report.
“The company has in place its ‘multi-year transformation programme’ and remains encouraged by the momentum of the progress, though the market will still need to see evidence of this in the near to medium term,” he adds.
In addition to his lower target price estimate, Loh has lowered his earnings forecasts for the FY2021 to FY2023 by 6-43%, with the largest changes pertaining to FY2021.
This is due mainly to the poor performance of Yonghui Superstores in China, as well as a slightly lower margin outlook for the near to medium term, he says.
The lower target price is also due to the 12% reduction in Loh’s earnings per share (EPS) estimates for the FY2022.
“We peg our 2022 EPS estimate to a target multiple of 22.2 times which is 1 standard deviation below its 5-year average price-to-earnings (P/E) of 29.1 times (excluding 2020). We believe that the discount to its 5-year 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,” he says.
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“Additionally, we note that DFI – despite its size and organisational capabilities – could improve on its reporting transparency as it only discloses its geographic segments as either ‘North Asia’ or ‘South Asia’,” he adds.
Moving forward, Loh expects DFI to trade at higher multiples as the region sees a higher percentage of vaccinations within the population. Further evidence of DFI’s business transformation in the near to medium-term “reporting periods” will also contribute to the counter’s better share price performance, he says.
As at 11.17am, shares in DFI are trading flat at US$3.04, with an FY2021 P/B of 3.0 times and dividend yield of 3.9%.
Photo: Bloomberg
