Dairy Farm

Dairy Farm | Neutral

Target price: US$9.60

July 30 close: US$8.74

RHB Research, July 30

We downgrade Dairy Farm to "neutral" from "buy" with a new US$9.60 TP, offering a 5 per cent upside.

Dairy Farm has a five-year transformation plan to eventually improve market proposition, supply chain competence and omnichannel capabilities. While we are positive on long-term prospects, we expect to see opex (operating expenses) remaining high over the next 12-24 months, as it restructures and invests in stores and IT infrastructure. Associate Yonghui Superstores should also chart slower growth, as it invests in new digitised offline format – Chaoji Wuzhong, leading to startup losses in the current gestation phase. The health and beauty division registered double-digit growth in sales and operating profit across most of the markets. Improved operating leverage also raised earnings before interest and tax margin by 3.2 percentage points compared to the same period last year. We expect the strong performance to continue into H2 2018, with an increase in mainland Chinese tourists in Hong Kong and Macau driving the growth.

We prefer Sheng Siong for Singapore-listed consumer stock, which trades at 19 times fiscal 2019 price-to-earnings ratio (P/E), a discount to Dairy Farm. We think it offers a defensive investment since almost all of its income is derived from Singapore.

We expect earnings growth to be stable at 10 per cent compound annual growth rate over the next three years.

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