Broker's take: DBS upgrades Dairy Farm to 'buy', strong sales expected amid Covid-19 outbreak

DBS Group Research has upgraded regional retailer Dairy Farm from "hold" to "buy", but lowered its target price from US$5.20 to US$4.70.

Shares of Dairy Farm were trading at US$3.98 as at 2.32pm on Wednesday, up 0.5 per cent or US$0.02.

DBS raised its call on the counter due to the stock's newly-attractive valuation and expectations of robust future earnings amid the ongoing novel coronavirus outbreak, said analysts Alfie Yeo and Andy Sim in a report on Wednesday.

The analysts said Dairy Farm's share price had corrected by as much as 22 per cent since their last call, with low risk of parent company Jardine Matheson Holdings cutting the current 5.3 per cent dividend yield as it would want to receive dividends for cashflow purposes.

The analysts also said Dairy Farm's core grocery retail business was attractively valued at under 10 times its earnings, after stripping out the value of its stakes in Robinsons Retail Holdings and Yonghui Superstores.

"Given that earnings would be supported by brisk sales during the Covid-19 outbreak, we believe downside for the stock is limited," the analysts noted.

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They added that grocery retail sales are expected to remain resilient as consumers across Asia dine at home more frequently amid greater social distancing.

Other factors contributing to Dairy Farm's expected rise in sales include panic buying by consumers in anticipation of a lockdown, higher sales of healthcare items such as masks and sanitisers, and sustained demand for food and healthcare products in the event of a prolonged pandemic.

"In times of weaker consumer sentiment, customers may trade down from high-end supermarkets to the mass-market segment. Dairy Farm has plans to strengthen its marketing to the mass-market segment and target specifically local consumers," the analysts said.

They added: "Risk of supply-chain disruption is not expected to be high as Dairy Farm and its suppliers have varied procurement sources and are flexible enough to switch products or sources when required."

On March 24, Dairy Farm brands Cold Storage, Giant, Market Place and Jason's Deli implemented a dedicated shopping hour and special checkout queues in stores for senior citizens and other vulnerable groups to ensure their access to food and other essentials.

In a separate market report, DBS also issued a "buy" recommendation on mass-market supermarket player Sheng Siong - another beneficiary of improved supermarket sales - with a target price of S$1.45.

Sheng Siong shares were trading 0.9 per cent or S$0.01 higher at S$1.11, as at 2.32 pm on Wednesday.