Broker's take: CGS-CIMB maintains 'add' on Dairy Farm, raises TP to US$5.50

CGS-CIMB has maintained its "add" recommendation on Dairy Farm International with a higher target price of US$5.50 compared to US$4.50 previously.

Long-term investors who are looking to visit recovery plays should find the supermarket chain operator attractive, said analyst Cezzane See in a report on Thursday. They must also be willing to ride out the stock's volatilities linked to uncertainties in Hong Kong's economy along with risks of uneven recovery in Covid-19 and the group's South-east Asia business, she added.

In her view, the counter's valuation remains attractive and below the long-term average, with most of the near-term Covid-19 uncertainties already priced in.

"(At US$4.23, the stock) is currently trading at about 19 times FY2021 price-to-earnings (P/E), close to minus-one standard deviation from its 2007-2019 average mean... We now think Dairy Farm should trade at 22 times P/E ratio, close to its -0.5 standard deviation from its long-term average, on the back of a vaccine emerging sometime in FY2021," elaborated the analyst.

She however cautions of potential moderation in the group's FY2021 earnings before interest and tax, due to lower supermarket and hypermarket margins as the global economy recovers.

Ms See has nonetheless projected an FY2021 net profit growth of 32 per cent for Dairy Farm based on an anticipated recovery in the group's 50 per cent-owned restaurant business, Maxim's, as well as sustained earnings from its associates Yonghui and Robinsons Retail Holdings.

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She has also factored in improved FY2021 margins for the convenience, and health and beauty segments when footfall picks up across the group's markets.

"Rerating catalysts are a swifter-than-expected resolution to Covid-19; no re-emergence of significant Hong Kong protests, better sales growth and margin expansion. Downside risks are a slow resolution of Covid-19; continued Hong Kong protests, weaker sales/margins and lower dividend payouts," said Ms See.

As at 3.22pm, Dairy Farm shares were up by US$0.12 or 2.8 per cent at US$4.39.