• Expect more robust outlook on sales in ASEAN, Hong Kong and China driven by COVID-19.
• Raise Dairy Farm's FY20-21F earnings by 5-7% on more positive demand for grocery retail sales.
• Valuation compelling with PE trading at near -1SD of its historical mean, yield is attractive at 4.3%.

More Positive on Outlook

Valuations still attractive as we see more positives for the stock:

• Since our last update to a BUY recommendation, Dairy Farm (SGX:D01) has returned 22% from US$3.96, hitting above our target price of US$4.70.
• Valuations remain attractive with the stock trading at -1SD of its historical mean PE. After we raised our recommendation to BUY on 25 March, we have been seeing more positive indicators that will drive higher earnings. Some of the factors include
  • Strong Hong Kong grocery retail sales momentum;
  • More stay-home advisories from ASEAN countries;
  • Yonghui’s nationwide market share gain according to data from Kantar.

Supermarket retail sales in Hong Kong showing strength:

• The latest retail sales data from Hong Kong showed that supermarket sales for the month of February 2020 was up by 12% y-o-y. There should not be any Chinese New Year effect as this year’s festive dates fell on 25-26 January compared to 5-6 February last year. This indicates strong demand for supermarket sales in Hong Kong for February 2020.
• Outlook for supermarket sales should remain robust given strong momentum backed by the social-distancing crowd and staying home as a result of COVID-19.

China operations see more positives as Yonghui gains market share nationwide:

• We note that Yonghui had gained market share in China in January and February 2020 at 4.8% of the China market, based on data from Kantar. This compares to 4.6% at end-2019 and 4% at end-2018. Yonghui’s share price has also recovered from RMB9.92 to RMB10.66 now. Both of these would be positive for Dairy Farm’s earnings contribution and our SOTP-valuation for Dairy Farm.
• China cities are slowly opening up and normalisation of activities would be beneficial for Dairy Farm’s Starbucks and 7-Eleven outlets as well.

ASEAN lockdown beneficial to grocery sales:

• Further to our last upgrade on Dairy Farm,
  1. Singapore has implemented a Circuit Breaker which has seen students and majority of the workforce staying home;
  2. Malaysia has extended its Movement Control Order by another month from 31 March to 28 April 2020;
  3. Indonesia has implemented Pembatasan Sosial Berskala Besar (PSBB) measures to contain the COVID- 19 situation.
• We are now more positive on higher demand for groceries following the implementation of these plans.

Raise Earnings Forecasts by 5-7%

• Given a more bullish outlook for grocery retail sales across ASEAN, Hong Kong and China, we raise our FY20-21F earnings forecasts by 5-7%. The higher earnings include more robust sales for the supermarket segment, and higher operating margins as operations improve along with some government support packages.
• We impute higher Yonghui earnings growth expectations into our associates/JV income as well.

Maintain BUY With Higher Target Price of US$5.59

• Our SOTP-valuation of Dairy Farm is now US$5.59, comprising core business at US$3.52 based on DCF, the value of its 20% stake in Yonghui at US$2.42 based on our Yonghui Target Price, the value of its 18% stake in RRHI at US$0.26 based on market value, and net debt at US$0.61.
• Dairy Farm currently pays a dividend yield of 4.3% with minimal risk of dividend cut as we believe parent company Jardine would prefer to maintain the DPS payout.

Source: DBS Research - 15 Apr 2020