• While 2021 will remain challenging for Dairy Farm International given margin pressures, we point to incrementally positive newsflow that should benefit the company in the medium term. These include higher vaccination numbers in Dairy Farm International’s key markets, the opening up of Hong Kong to mainland travelers, and the stabilisation of retail spending in Hong Kong.
• Maintain BUY.

Incrementally Positive Newsflow for Dairy Farm International

• We highlight that the newsflow for Dairy Farm International (SGX:D01)’s key markets in North and South Asia have been incrementally positive in the past couple of months, in our view. These include:
  1. increased vaccination rates in Hong Kong, Indonesia, Malaysia, Singapore and Thailand as well as in China,
  2. upgrades to some economics forecasts for both Hong Kong and Singapore, and
  3. stabilisation of retail spending numbers from Hong Kong.
• Vaccination status more positive. 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 3-6 months. In the medium term, this in turn should result in better tourism-related spending as well as higher domestic spending in Dairy Farm International’s food & beverage business (including Maxim’s) and Ikea stores in Indonesia for example.

Travel Gradually Opening Up Between Hong Kong and China

• Earlier this week, the Hong Kong government stated that it will allow quarantine-free entry for the Thai economy to only grow by 0.7-1.2% in 2021, down from its prior forecast of 1.5-2.5% made three months ago. In addition, Indonesia has downgraded its forecast for 2021 economic growth to range between 3.5-4.3% vs 4.1-5.1% previously.

Maintain BUY Rating on Dairy Farm International

• We peg our 2022 EPS estimate for Dairy Farm International to a target multiple of geographies.
• However, we note that Dairy Farm International – 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”.

• Vaccination and business transformation progression. As the region progresses towards having a greater proportion of its population vaccinated, and further evidence of Dairy Farm International’s business transformation surfaces in the near to medium-term reporting periods, we expect Dairy Farm International to trade at higher multiples compared with the present.

Source: UOB Kay Hian Research - 10 Sep 2021