Dairy Farm International Holdings

Dairy Farm International Holdings | Buy

Target price: US$9.54

March 12 close: US$8.09

DBS Group Research, March 12

We maintain our "Buy" rating on Dairy Farm (DFI), but lower our sum-of-the-parts-based target price marginally to US$9.54. FY17 core profit growth was within expectations, led by strong contribution by Yonghui. We see growth driven on two fronts, namely better margins from operationally-led store efficiencies, and earnings growth from Yonghui. Current share price ex-Yonghui values DFI's core business at just 17 times forward price earnings, below the regional peer average and its 9-year historical average forward PE of 24 times. While consensus is negative on DFI, we are positive that new CEO Ian McLeod and his initiatives to improve performance of the stores will pay off over the next few years. We see earnings turnaround ahead as a stock catalyst. We believe successful implementation of strategies by the CEO will be key to earnings recovery.

We value DFI's core business at US$7.70 based on DCF (discounted cash flow) and the 20 per cent stake in Yonghui based on the market value of US$2.28 and net debt of US$0.45 per share.

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