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Broker's take: CGS-CIMB upgrades Dairy Farm to 'hold' as main markets ease Covid-19 lockdowns

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CGS-CIMB, in a note dated Tuesday, upgraded Dairy Farm International to "hold" from "reduce" and raised the target price to US$5.45 from US$4.38 on less negative valuations, given the easing of Covid-19 restrictions in most of its main markets by June and signs of retail recovery in Hong Kong.

CGS-CIMB, in a note dated Tuesday, upgraded Dairy Farm International to "hold" from "reduce" and raised the target price to US$5.45 from US$4.38 as most of its main markets slowly ease out of Covid-19 lockdowns.

The counter was trading at US$5.06 as at 11.28am on Wednesday, up US$0.06 or 1.2 per cent.

Analyst Cezzane See forecast a higher price-to-earnings ratio of 20 times for FY21, up from the previous 17 times. This is close to -1 standard deviation from its 2007-2019 average, she said.

At current levels, the negatives have been priced in and investors should "await the recovery", she added.

Ms See upgraded her forecast for the company's FY21-22 earnings by between 4.5 and 5.3 per cent on higher earnings before interest and taxes (Ebit) margins for most of its formats and restaurant businesses.

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However, the company's health and beauty earnings forecasts remained unchanged, as the segment "still faces medium-term risks from weak near-term Hong Kong tourist visitation", she said.

"What is left is a recovery of Chinese tourism to Hong Kong before we turn more positive on the stock," Ms See wrote. "As Hong Kong retail data points bottomed in February-March 2020, we turn less negative on valuations." 

Ms See said Chinese visitors are a key driver of the company's Hong Kong health and beauty segment, North Asia sales, and Ebit growth. In 2019, Hong Kong stores (excluding restaurants) accounted for about 32 per cent of Dairy Farm's total subsidiary stores.

She maintained her forecast on Dairy Farm's earnings for the current financial year, noting the company's warning that its Malaysian and Indonesian health and beauty segments could be hit in Q2, and a global recovery period from the impact of Covid-19 lockdowns in the first half of the year.

The stock's expected FY20 dividend per share of US$0.21 - implying a dividend yield of 4.4 per cent - "should be intact", Ms See added, as the company earlier assured investors of its financial position in a Q1 interim update.

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