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ed-TH / sa- JC
Watch your diet
Reality did bite in past two months since our last
issue; share prices came off, expectations moderated
Revised 2015 aggregate growth forecast down to
6%, from 12% a quarter ago
Less cautious now, but still not time to go all out as
macro and consumer sentiment remain subdued
Look for stocks trading at cheaper valuations vis-à-
vis historical averages; avoid stocks with high
valuations but slowing growth
2Q15 results disappointed. As expected, the recent 2Q15
report card was not rosy. We continued to see a fair number
of earnings disappointments with 41% of stocks under our
ASEAN consumer coverage reporting results that were below
our expectations (similar to 1Q15). This compares to 18%/
41% of the companies under coverage which were above/ in
line. Disappointments were largely due to slower topline
growth, currency impact and margin contraction as we had
earlier envisaged in our previous Food for Thought issue
#03/15 (“Reality bites”, 23 July 2015).
2015 growth lowered to 6%. Post 2Q, we lowered our
FY15F profit growth forecast by 6ppts and now expect growth
of just 6%, down substantially from 12% in July. This was
brought about by the heightened global uncertainty,
downward GDP revisions, and subdued management outlook
and the recent lacklustre earnings.
Less cautious but consumer sentiment remains weak. We
are adopting a less cautious stance compared to a couple of
months back given that expectations have moderated
considerably. At this juncture, however, we do not expect a
significant pick-up in 3Q15 earnings as consumer sentiment
remains subdued. While there have been a couple of stimulus
packages announced, we believe it would take time to work
its way down to have an impact on the broader economy.
Take time to browse the menus; stick with staple plays
with more attractive valuations. We recently upgraded
Dairy Farm (DFI SP) to BUY as we believe there is value after
the recent share price correction.. We continue to like
Puregold Price Club (PGOLD PM) and Indofood Sukses
Makmur (INDF IJ) as a staple play and consumer proxy for the
respective countries, and attractive valuations. We also expect
PGOLD to benefit from the potential rise in consumption to
the lead up to the Presidential election in 2016. Our pick in
Thailand is CP ALL (CPALL TB) for its resilience during a
slowdown and its wide store network. We would avoid
Unilever Indonesia (UNVR IJ) and Petra Foods (PETRA SP) given
their high valuation.
STI : 2,868.47
KLCI : 1,635.37
JCI : 4,344.04
SET : 1,379.32
PCOMP : 7,051.23
Analyst
Andy Sim +65 6682 3718
andysim@dbs.com
Alfie Yeo +65 6682 3717
alfieyeo@dbs.com
King Yoong CHEAH CFA +603 2604 3908
cheahky@alliancedbs.com
TAN Kee Hoong +603 2604 3913
keehoong@alliancedbs.com
Namida Artispong +662 658 1222
namidaa@th.dbsvickers.com
Edwin Lioe +6221 3003 4900
edwin.lioe@id.dbsvickers.com
Regional Research Team
STOCKS PICKS
Source: Bloomberg Finance L.P., DBS Bank, DBS Vickers, AllianceDBS
Closing price as of 22 Sep 2015
DBS Group Research . Equity 25 Sep 2015
South East Asia Industry Focus
ASEAN Consumer: Food for thought
Issue #04/15
Refer to important disclosures at the end of this report
Price Mkt Cap
Target
Price
Performance (%)
Local US$m Local 3 mth 12 mth Rating
Dairy Farm 6.03 8,154 7.34 (30.7) (38.7) BUY
Puregold Price
Club
31.30 1,856 47.10 (15.6) (12.2) BUY
Indofood Sukses
Makmur
5,300 3,174 8,350 (22.6) (25.4) BUY
CP ALL 49.25 12,262 55.00 7.7 10.1 BUY
Unilever Indonesia 38,050 19,802 35,400 (6.1) 19.8 FULLY
VALUED
Petra Food 2.75 1,186 2.40 (21.4) (34.2) FULLY
VALUED
2. Industry Focus
ASEAN Consumer: Food for thought
Page 2
Table of Contents
Overview – Watch your diet 3
EETG – Eyes & Ears on the Ground 6
DBS ASEAN Consumer Stock universe performance 7
Feature in Pictures 10
Country briefings
Singapore 12
Malaysia 13
Thailand 15
Indonesia 17
Philippines 19
Macro Charts/ Data
GDP 22
Inflation 23
Forex 24
Input costs 25
PE & PB trading band charts 27
Same store sale growth 36
Peer comparison 38
Company Profile
Dairy Farm 40
Puregold Price Club 49
Indofood Sukses Makmur 53
Unilever Indonesia 55
Petra Food 57
3. Industry Focus
ASEAN Consumer: Food for thought
Page 3
Overview: Watch your diet
Reality did bite in 2Q. A lot has happened since our previous
Food for Thought issue on 23 July (“Reality bites”; issue
#3/15). Indeed, reality did really bite in 2Q results, as we had
earlier postulated. Regional markets have been roiled by
Chinese Yuan devaluation, and global growth concerns. Share
prices plunged and regional indices are now near 2011 Euro
crisis levels.
Still a fair bit of earnings disappointment in 2Q. Earnings
continued to disappoint in 2Q, relatively similar to 1Q. Among
the stocks under our ASEAN consumer coverage, the split was
41%/ 18%/ 41% for results that were above/ in line/ below.
The proportion that came in “below-expectations” was a tad
higher than 1Q15’s 38%. This was balanced by a marginally
higher percentage of results that were “above-expectations”,
at 18% vs 16% a quarter ago in 1Q15.
Chart 1: 2Q15 consumer earnings “misses” similar to 1Q15
Source: DBS Bank
But we are now less cautious compared to a couple of months
ago. On a relative scale, we are less cautious now as
compared to our stance in the last issue (in July). This is not
premised on our views that macro factors have turned north.
Instead, it is due more to moderated growth expectations vis-
à-vis valuations. Growth projections have been revised down
but share prices have corrected more, which resulted in lower
valuations.
2015 profit growth cut further; growth forecast now at mid-
single digits. We are now projecting 2015 earnings growth of
6.5% for our ASEAN consumer coverage. The cuts in growth
were not surprising. We had earlier highlighted that there was
downside risk to our forecasts given the cloudy macro
outlook. However, the magnitude was slightly larger than
expected and seemed to have picked up pace from earlier
months. Although earnings projections were progressively
adjusted down in the earlier part of this year, the magnitude
was around 2-3ppts at each interval.
The cut in earnings came largely from Singapore and Thailand
companies. Within our Singapore coverage, the earnings cut
was due to weaker than expected performance and higher
costs. DFI surprised on the downside with higher than
expected labour and rental costs. Given companies’ regional
exposure, we also saw disappointments from slower sales and
weaker margins from stocks such as Petra Foods (impacted by
weaker IDR), Super and OSIM.
In Thailand, CPF disappointed and earnings were revised down
to reflect the drop in domestic livestock prices, weak exports
and margins, coupled with higher expenses.
Chart 2: FY15F net profit growth now at 6% Chart 3: FY16F largely maintained, given lower base in FY15F
Source: DBS Bank estimates Source: DBS Bank estimates
12.4%
11.1%
9.9%
8.2%
18.3%
15.1%
12.3%
6.1%
0.0%
5.0%
10.0%
15.0%
20.0%
Post 4Q14 (Feb-15) Post 1Q15 (May-15) Pre-2Q15 (Jul-15) Post-2Q15 (Aug-15)
FY15F revenue gwth over FY14A (%) FY15F net profit gwth over FY14A (%)
-3.2% pt
-2.8% pt
-6.2% pt
10.4%
11.0% 10.6%
7.9%
13.1% 12.8% 13.0%
11.9%
0.0%
5.0%
10.0%
15.0%
20.0%
Post 4Q14 (Feb-15)Post 1Q15 (May-15) Pre-2Q15 (Jul-15) Post-2Q15 (Aug-15)
FY16F revenue gwth over FY15F (%) FY16F net profit gwth over FY15F (%)
-0.3% pt +0.3% pt
-1.1% pt
38% 41%
47% 41%
16% 18%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q15 2Q15
Above
Inline
Below
4. Industry Focus
ASEAN Consumer: Food for thought
Page 4
Table 1: Aggregate change in net profit forecasts (by country) from Jul-15 to Sep-15
Change in profit forecasts from
July-15 to Sept-15
FY15F FY16F Comments
Singapore -10.4% -11.1% Earnings forecast of DFI, Super, OSIM, Petra & F&N were lowered. Downward
adjustments due to slower topline, higher costs (labour, rental) and impact
from weaker currencies (eg Petra). F&N’s adjustment due to disposal of
Myanmar Brewery Limited back to JV partner.
Malaysia -1.4% -5.7% General cuts, but mainly from MSM due to weaker MYR
Thailand -8.1% -10.7% Revision largely from CPF on weaker than expected performance and outlook
Philippines -2.0% -2.6% Adjustments to URC and JFC from lower topline and margins assumptions
Indonesia -3.5% -4.6% Cuts on LPPF IJ on slower SSSG as company lowered its guidance
Total -6.5% -8.0%
Source: DBS Bank estimates
Not expecting major turnaround in sentiment
Not expecting major turnaround in consumer sentiment,
though government stimulus may surprise. Consumer
sentiment still remains fragile across the region due to political
events, weak macro outlook and volatile currencies. While our
economists do not forsee a repeat of the Asian Financial Crisis,
there are near term headwinds. Over the past few months,
our economists have trimmed down their respective GDP
forecasts for ASEAN5 by 0.1ppt to 1.4% for 2015 and 2016.
The reasons cited are not new – macro headwinds, weak
investment, softer commodity prices, political uncertainty,
volatile currencies, and so forth.
Table 2: GDP forecasts revised down on global macro outlook
As of Jun’15 As of Sep’15 ppt chg*
2015 2016 2015 2016 2015 2016
Singapore 3.2 3.5 1.8 2.1 -1.4 -1.4
Malaysia 4.9 5.0 4.8 4.5 -0.1 -0.5
Thailand 3.2 4.5 2.8 3.7 -0.4 -0.8
Indonesia 5.1 5.5 4.8 5.2 -0.3 -0.3
Philippines 6.0 6.2 5.7 6.1 -0.3 -0.1
US 2.2 2.5 2.4 2.5 0.2 0
Japan 1.1 1 0.6 0.9 -0.5 -0.1
Eurozone 1.0 1.3 1.4 1.4 0.4 0.1
China 7.0 6.8 6.8 6.5 -0.2 -0.3
*note: ppt chg measures the difference between Jun-15 and Sep-15
forecasts, but there were revisions during the intervening period.
Source: DBS Bank estimates
Growth in 2016 is stronger, but downside risks persist if GDP
is tuned down. At this juncture, we are projecting an net
profit growth of c.12% in 2016. This is a step-up from the
6% profit growth we projected in 2015 but is relatively in line
with expectations of higher economic growth next year. As
the table above suggests, our economists are projecting a
marginally stronger rate of growth for all countries in
ASEAN5, save for Malaysia.
Indonesia, Thailand and Malaysia have introduced stimulus
packages. In September, there were a number of stimulus
packages announced by the Indonesian, Thai and Malaysian
governments. While this seems positive and could be a step in
the right direction, we believe it would take some time for the
effects to trickle down to consumers.
Watching consumer sentiment and GDP upgrades. Consumer
sentiment remains lacklustre across the board. Since our last
issue, Thailand’s Confidence Index (CCI) slipped further to
72.6 in August declining from 74.4 in June, which had been
falling since hitting a recent peak in Dec-14. This follows
Malaysia’s MIER (Malaysia Institute of Economic Research)
consumer sentiment index which slipped lower to 71.7 for the
quarter ending June. The brighter spots are Indonesia and
Philippines which are holding up since declines earlier this
year. At this juncture, we do not envisage a major turnaround
in sentiment in 4Q, but would watch for encouraging signals
before turning more positive.
Table 3: Summary of stimulus packages announced by Thai, Indonesian and Malaysian authorities
Country Date Comments
Thailand 2 Sep'15 Three part stimulus package amounting to THB136bn to boost the economy - interest free loans to low income
earners; cash injection for small construction projects that employ locals, budget for small government projects
to award to SMEs.
Indonesia 9 Sep'15 Economic stimulus package #1 to spur real estate, support micro, SME and co-operative businesses and protect
mass consumers. Package #2 & 3 expected to be revealed in late Sep.
Malaysia 14 Sep'15 RM20bn injected into ValueCap, an investment company, to buy undervalued stocks.
Source: News announcements, DBS Bank
5. Industry Focus
ASEAN Consumer: Food for thought
Page 5
Stock picks:
Take time to browse the menu; focus on valuations. While
share prices have corrected in the past months, time is still on
the prospective investors’ side. From a fundamental
perspective, underlying demand and sentiment remain weak
and could present headwinds for companies’ operational
performances. We continue to look for stocks with attractive
valuations, staple and more resilient plays, while avoiding
discretionary, high valuation counters. We like DFI, PGOLD,
INDF. In Thailand, our pick is CPALL as it is a beneficiary when
consumers trade down to smaller ticket items. Continue to
avoid UNVR IJ.
Summary of picks
Dairy Farm, BUY; TP: US$7.34. We recently upgraded the
stock to BUY as we believe the recent 21% share price
correction (post 1H15 results) has priced in the negatives.
1H15 results was impacted by higher operating costs from
rental rates in HK, weaker regional currencies vs the USD, and
labour costs. We further factored in 3-4% lower earnings to
account for weaker GDP growth and regional currencies and
still found valuations to be attractive. The stock currently
trades at an attractive valuation of between -1.5 to -1SD of its
7-year mean. Our analysis suggests that the current share
price is now valuing DFI’s core business at 18x FY16F PE, a
deep discount to peer and historical average PE multiple of
25x.
Puregold (PGOLD) BUY, TP: PHP47.10. PGOLD remains our top
Philippine consumer pick to leverage on the current low
inflation backdrop and is best positioned to capture the boost
in consumption leading up to the May 2016 presidential
elections. Subsidiary S&R continues to face some near-term
challenges (i.e. rising inventor days, margin contraction, and
slowing SSSG – which we have factored in our forecasts).1H15
reported numbers were in line with our call and is on track to
hit our FY15 estimate.
Share price may continue to be weak due to the overall
subdued market sentiment and concerns over S&R. We
however see this as an opportunity to accumulate PGOLD at
more attractive valuations. The stock is trading at an attractive
17.5x/15x on FY15F/16F EPS. Growth profile is better for
FY16F, boosted by election spending.
Indofood Sukses Makmur, BUY; TP: Rp8,350. INDF is a
cheaper entry and proxy to the Indonesia consumption story.
At its current price, investors would gain exposure to its
subsidiary, Indofood CBP (ICBP IJ) at c.41% discount to ICBP’s
current market price. In addition, INDF is currently trading at
about -1SD of its 10-year historical PE trading band, and offers
a dividend yield of c.4.2%.
CP ALL, BUY; TP: THB55. CPALL’s operations should be
resilient as food is a staple, and consumers tend to spend on
small ticket items when consumption slows down, and
CPALL’s wide network offers convenient access to its
products. SSSG should improve further in 2H15, boosted by
the new stamp campaign which will run from July to
November. Earnings growth is expected to be strong (+28%
FY15F, +22% FY16F), driven by aggressive expansion and
fatter margins from a larger share of ready-to-eat foods (high-
margin), declining expenses from MAKRO acquisition, and
lower interest expense.
Avoid Unilever, FULLY VALUED; TP: Rp35,400. We maintain
our Fully Valued recommendation on Unilever Indonesia Tbk
PT. No doubt it is a proxy to Indonesia’s consumer sector, but
we believe the counter is overvalued on the back of its
lackluster growth profile. The stock is trading at 50.9x/ 47.4x
FY15F/ 16F PE, which is almost +2 standard deviation above its
historical average. We also believe the impending rights issue
of Sampoerna, Indonesia’s largest cigarette manufacturer,
could take some shine off Unilever.
Avoid Petra Foods, Fully Valued; TP: S$2.40. We advocate
avoiding Petra as well. We see downside to share price on the
back of the continued weakness in IDR along with subdued
consumer sentiment. This could continue to suppress margins
and present downside to our and consensus’ estimates. We
estimate that about 60% of COGS is denominated in USD
which negates the effects of lower commodities prices.
Valuations are not low. It is currently trading at 31x/ 28x
FY15F/16F PE. With potential downside to our earnings
estimates on the back of continued weakness in IDR, we
believe share price has downside bias at least in the near term.
6. Industry Focus
ASEAN Consumer: Food for thought
Page 6
EETG – Eyes & Ears on the Ground
[DBS ASEAN Consumer team: In this section, we bring you updates from the ground, pertaining to policies, economics, consumer
sentiment, corporate developments, competition analysis, price wars and new product developments, which we believe will keep
you up-to-date]
Country Comments
Singapore Singapore-based Honestbee and NTUC Fairprice have partnered to enable customers to have FairPrice products delivered to
them within the next hour. It also has partnerships with 7 other retailers, including Cold Storage, Mmmm! and The Butcher's
Dog. There are plans add more partnerships with other retailers. Consumers can order from multiple retailers under Honestbee
and have their various orders packaged into 1 single delivery.
July retail sales (ex motor vehicles) increased 0.8% y-o-y, driven by spending in departmental stores (+3.0%), recreational
goods (+3.7%), telecommunications apparatus and computers (+6.4%), medical goods (+9.9%) and watches & jewellery
(+11.7%). Including motor vehicles, retail sales would have improved 5.2% y-o-y as vehicle sales rose 40.6%. F&B sales
declined 3.2% y-o-y, dragged by restaurants (-3.5%).
Malaysia The data released by Retail Group Malaysia (RGM), an independent retail research firm, showed that sales of Malaysian retail
industry dropped sharply by 11.9% y-o-y in 2Q15. With the dismal performance in 2Q15, RGM has cut its 2015 retail sales
forecast for Malaysia to 3.1%, compared to its earlier forecast of 4%. RGM now expects industry sales to growth by 2.5% in
the 3Q and 6% for the 4Q.
2Q15 consumer sentiment index fell further by 0.9 points to a six-year low of 71.7 (1Q15: 72.6), indicating continued sluggish
consumer spending in the coming quarters as consumers remain wary of the future and becoming more cautious due to rising
cost of living. This has reaffirmed our ground check that consumer spending and visitations to shopping malls have yet to
recover to pre-GST levels, despite more than five months have passed since the GST implementation in early April. This
indicates that consumer sentiment remains weak.
Indonesia On 9 September, President Jokowi announced the Economic Stimulus Package #1 which aims to spur the real estate sector
forward, support micro, SME & cooperative businesses and protect mass market consumers. Gov’t is preparing to revise or
deregulate 89 (out of 154 proposed regulations).
2Q15 GDP growth was weaker than expected at 4.67% y-o-y, vs. 4.71% observed in 1Q15. This brought 1H15 GDP growth
to only 4.7% and prompted the Central Bank to revise down its full year growth target to 4.7-5.1% from the previous 5.0-
5.4% (in line with DBS’ forecast of 4.8%).
August annual inflation was 7.18% y-o-y, easing slightly from 7.26% y-o-y in July. However, core inflation crept up slightly to
4.92% y-o-y from 4.86% y-o-y the month before.
Thailand The government announced three new stimulus measures worth a combined Bt136bn to boost the economy; i) five-year term
loans worth Bt59bn to be offered to low-income earners via 59,000 Village Funds at Bt1m each, (ii) Bt35bn budget for grants
of Bt5m each to 7,000 tambons nationwide for construction and repair works, (iii) Accelerating budget disbursements for
small projects below Bt1m with a budget of Bt16bn.
Consumer confidence continued to edge down to reach 72.6 in August. The government stimulus could boost domestic plays
though the actual effects could take some time to trickle down.
On 17 Aug 2015, a bomb exploded at Rachatprasong intersection near the Erawan shrine at 7pm, killing 19 people and
injuring more than 100. This is negative for Thailand as it occurred in the city centre of Bangkok. While there could be near
term impact on tourism, arrivals should eventually rebound.
Philippines 2Q15 GDP up 5.6% y-o-y, an improvement from 1Q15's revised growth of 5%, but marginally behind consensus estimate of
5.7%. The government is looking to revise down its growth target for 2015 to 6 – 6.5% from 7 to 8%.
Headline inflation continued its downtrend to a new low of 0.6% in August from 0.8% in July, slightly below consensus
estimate of 0.7%.
Of the 6 consumer stocks, 3 missed our expectations, while 2 were above expectations with 1 in line. URC being the
bellwether for consumer saw 25% y-o-y earnings growth, but this was below expectations with domestic sales up only 10%.
Source: DBS Bank, DBS Vickers, AllianceDBS
7. Industry Focus
ASEAN Consumer: Food for thought
Page 7
Performance Review and Regional Benchmarks
July to September was not a forgiving quarter. The period
since our last issue saw major blood-letting. Singapore was hit
hard, with its consumer indices as the worst performers YTD,
ahead of the other ASEAN markets. This could also be due to
the earnings disappointments arising from its regional
exposure, and without a domestic market to support earnings.
Staples continued to outperform discretionary. Within ASEAN,
staples performed relatively better than discretionary plays as
per our expectations since early this year, though all indices,
except Thailand, continued to stay in negative territory YTD
reaching a peak earlier in May. The muted performances were
not at all surprising given macro headwinds.
Regional benchmark consumer indices’ valuation and performance
Source: Bloomberg Finance L.P., DBS Bank (as of 21 September 2015)
Regional benchmark consumer indices’ performance YTD
Source: Bloomberg Finance L.P., DBS Bank (as of 21 September 2015)
Be nchma rk Indice s
Inde x PE (Act) PE (Yr 1) Div Yie ld 1M 3M 6M 1YR QTD % YTD %
MSCI Consume r Sta ple s
MSCI SINGAPORE/CON STPL 13.8 11.3 2.7 (8.4) (20.5) (18.9) (26.1) (21.0) (23.3)
MSCI MALAYSIA/CON STPL 29.6 22.3 2.8 3.2 (0.9) (8.9) (12.6) (1.0) (8.9)
MSCI THAILAND/CON STPL 25.9 29.2 2.1 6.6 2.0 17.7 (4.2) 1.0 2.9
MSCI INDONESIA/CON STPL 27.0 22.1 2.3 5.1 (13.4) (18.0) (13.1) (9.5) (13.0)
MSCI PHILIPPINES/CON STP 33.2 31.3 1.6 (0.9) (4.7) (13.3) 7.1 (1.7) (2.7)
MSCI CHINA/CON STPL 24.4 20.9 8.6 (5.6) (18.7) (9.0) (16.8) (16.4) (12.3)
MSCI AC AS xJ/CON STPL 24.2 22.3 2.9 (1.8) (11.3) (7.4) (10.5) (11.2) (4.5)
MSCI EM ASIA/CONSUM STAP 25.8 24.1 3.0 (1.6) (10.4) (6.8) (9.0) (10.5) (3.2)
MSCI Consume r Discre tiona ry
MSCI SINGAPORE/CONS DIS 18.1 17.2 3.7 (4.0) (12.7) (16.5) (22.6) (10.3) (21.6)
MSCI MALAYSIA/CONS DIS 19.9 17.0 2.0 2.2 (8.9) (11.3) (17.9) (8.2) (12.1)
MSCI THAILAND/CONS DIS 24.1 24.2 2.5 10.6 (2.4) (11.8) (18.5) (4.1) (16.1)
MSCI INDONESIA/CONS DIS 16.6 15.6 3.3 (1.1) (12.9) (25.8) (21.0) (13.0) (17.7)
MSCI PHILIPPINE/CONS DIS 36.9 35.5 0.9 2.5 (2.8) (11.1) (3.8) (3.4) (11.4)
MSCI CHINA/CONS DIS 11.2 9.5 3.0 4.3 (22.9) (24.0) (19.1) (22.8) (12.4)
MSCI AC AS xJ/CONS DIS 11.0 11.6 2.8 1.3 (11.3) (17.8) (26.7) (10.0) (18.1)
MSCI EM ASIA/CONSUM DISC 10.3 10.8 2.2 4.0 (10.0) (16.7) (23.3) (9.9) (14.5)
2.9
(2.7) (3.2)
(4.5)
(8.9)
(11.4) (12.1) (12.3) (12.4) (13.0)
(14.5)
(16.1)
(17.7) (18.1)
(21.6)
(23.3)(25.0)
(20.0)
(15.0)
(10.0)
(5.0)
-
5.0
YTD %
8. Industry Focus
ASEAN Consumer: Food for thought
Page 8
Regional benchmark consumer indices’ performance from 25 May to 16 July 2015
Source: Bloomberg Finance L.P., DBS Bank (as of 21 September 2015)
Stock picks’ performance since 23 July 2015
Note:
*DFI and DMPL period differs as we changed our rating to HOLD post respective companies’ results release.
** Returns for Unilever should be positive. Chart shows share price performance; Fully Valued recommendation
Source: ThomsonReuters, DBS Bank (as of 22 September 2015)
5.8
2.1 1.6
0.1
(3.6)
(4.8)
(7.7)
(8.7)
(9.4) (9.8)
(11.2) (11.6)
(12.3) (12.4)
(15.0)
(16.6)
(20.0)
(15.0)
(10.0)
(5.0)
-
5.0
10.0
Holding Period Return %
(23/7/15 - 21/9/15)
(3.8)
(17.9)
(14.5)
(17.2)
(5.2)
(20.0)
(15.0)
(10.0)
(5.0)
-
Dairy Farm
International
Holdings Ltd*
DelMonte Pacific
Ltd*
Indofood Sukses
Makmur Tbk PT
Puregold Price Club
Inc
Unilever Indonesia
Tbk PT**
Holding period return (%)
23/ 07/2015 - 22/09/2915
9. Industry Focus
ASEAN Consumer: Food for thought
Page 9
DBS ASEAN consumer universe performance
Source: Thomson Reuters, DBS Bank, DBS Vickers, AllianceDBS(as of 21 September 2015)
DBS Asean Stock Univ erse
Company Rating TP 1m 3m 6m 12m YTD % QTD %
Market Cap
(US$m)
Mkt cap
weighted
av g return
Thai Beverage PCL Buy 0.81 -8.5% -10.3% -6.6% -3.4% 2.9% -0.6% 12,330 0.3%
Dairy Farm International Holdings Ltd Buy 7.34 -11.2% -30.0% -33.1% -35.9% -30.6% 0.3% 8,140 -2.0%
Fraser and Neave Ltd Hold 2.45 1.0% -25.2% -27.4% -32.8% -24.2% 0.0% 2,095 -0.4%
Petra Foods Ltd Fully Valued 2.40 -13.3% -20.3% -22.3% -33.4% -26.4% -2.0% 1,192 -0.2%
Super Group Ltd Hold 1.05 -1.2% -25.4% -42.0% -35.4% -25.2% 0.0% 660 -0.1%
OSIM INTERNATIONAL LTD Hold 1.61 5.3% -9.4% -21.5% -38.6% -18.7% -3.7% 883 -0.1%
Sheng Siong Group Ltd Buy 1.00 -1.8% -1.4% 13.4% 31.4% 25.7% -1.2% 900 0.2%
Del Monte Pacific Ltd Hold 0.35 -3.0% -8.6% -1.5% -33.9% -30.6% 2.9% 446 -0.1%
Courts Asia Ltd Hold 0.35 11.1% 8.7% -6.2% -9.3% -14.9% 2.6% 161 0.0%
Singapore return -2.5%
British American Tobacco Malaysia Bhd Hold 63.40 2.5% 3.6% -8.1% -8.5% -1.9% 0.6% 4,174 -0.1%
QL Resources Bhd Hold 4.10 3.1% 4.1% 0.3% 18.5% 24.9% 1.0% 1,210 0.2%
MSM Malaysia Holdings Bhd Hold 5.20 1.0% -4.7% -1.2% 3.1% 1.8% 0.0% 819 0.0%
Padini Holdings Bhd Buy 1.50 2.5% 5.6% 5.1% -20.7% 0.3% 0.0% 217 0.0%
Oldtown Bhd Hold 1.40 -9.3% -16.0% -20.3% -25.5% -6.7% -0.6% 151 0.0%
Malay sia return 0.2%
CP All PCL Buy 55.00 4.2% 10.0% 31.5% 11.8% 18.4% 2.8% 12,520 1.8%
Charoen Pokphand Foods PCL Hold 22.00 17.8% -2.6% 7.7% -27.1% -15.8% 1.3% 4,840 -0.6%
Big CSupercenter PCL Hold 214.00 5.0% 3.4% -11.0% -11.4% -14.7% 0.3% 4,634 -0.5%
Minor International PCL Buy 35.00 11.9% 0.9% -12.3% -11.7% -3.5% 3.6% 3,502 -0.1%
Thai Union Frozen Products PCL Buy 22.40 6.7% -8.8% -6.6% 10.6% -12.6% -0.9% 2,580 -0.3%
Home Product Center PCL Hold 7.80 9.2% 10.0% -8.3% -14.0% -6.6% 2.3% 2,611 -0.1%
MK Restaurant Group PCL Buy 67.00 2.0% 6.6% 0.2% -3.4% 2.8% 0.9% 1,488 0.0%
Central Plaza Hotel PCL Buy 43.00 6.6% 3.6% 17.3% -6.6% 18.2% 2.1% 1,378 0.2%
Thailand return 0.4%
Universal Robina Corp Buy 229.00 -0.9% -3.7% -13.3% 8.8% -1.2% 1.0% 8,962 -0.1%
Jollibee Foods Corp Hold 187.00 2.5% -3.4% -10.8% -3.0% -11.0% -0.6% 4,390 -0.4%
Emperador Inc Hold 8.50 -14.0% -10.5% -28.8% -26.4% -22.0% 0.8% 2,761 -0.5%
Robinsons Retail Holdings Inc Buy 85.00 0.0% -5.2% -19.1% 14.1% -4.9% -0.6% 2,133 -0.1%
Puregold Price Club Inc Buy 47.10 -6.3% -16.3% -20.9% -9.3% -16.7% 0.0% 1,895 -0.2%
Century Pacific Food Inc Buy 21.70 -3.0% -6.5% -9.6% 7.2% 5.1% 0.7% 816 0.0%
Philippines return -1.2%
Kalbe Farma Tbk PT Hold 1,900 1.3% -7.6% -14.4% -8.3% -15.4% -0.6% 4,989 -0.6%
Unilever Indonesia Tbk PT Fully Valued 35,400 9.6% -5.9% 2.9% 24.3% 22.0% 0.2% 20,701 3.6%
Indofood Cbp Sukses Makmur Tbk PT Hold 13,500 0.6% -3.3% -15.6% 13.8% -2.7% 0.2% 5,081 -0.1%
Indofood Sukses Makmur Tbk PT Buy 8,350 -3.7% -24.8% -26.7% -23.6% -19.3% -0.7% 3,191 -0.5%
Matahari Department Store Tbk PT Buy 20,000 8.4% -3.7% -6.3% 5.8% 14.3% -0.6% 3,420 0.4%
Mitra Adiperkasa Tbk PT Hold 3,200 -26.8% -47.8% -38.1% -48.5% -40.9% -1.7% 346 -0.1%
Mayora Indah Tbk PT Hold 25,500 8.5% 2.9% -2.0% -6.0% 33.2% -3.3% 1,722 0.4%
Indonesia return 3.1%
Asean cov erage return 127,338 -0.1%
10. Industry Focus
ASEAN Consumer: Food for thought
Page 10
FIP: Feature in Pictures
How much of your beer goes into excise?
DBS ASEAN Consumer team:
The latest buzz in the global brewing industry is AB Inbev’s intention to acquire SABMiller Plc to create what will be the largest global brewer,
and control about half the industry profit, according to Bloomberg.
Bringing it closer to home, we did some studies on your pint of beer in the region and how much of what you pay goes into excise.
The next time you pop open a can of ice-cold beer, our estimate shows that a consumer is paying the most for excise in Malaysia (US$0.64 or
45% of the retail price). This is followed by Singapore at US$0.57 or about 28% of retail price. Seems like the cheapest places to have a chilled
beer are Vietnam, Cambodia and the Philippines. Cheers!
Top 3 consumed beer brands in the region, market share and respective excise taxes
Note: Exchange Rate: 1USD=SGD1.40, MYR4.25, THB36, IDR14,452, VND22,573 and PHP46.67 respectively (17 September 2015)
Figures are based on estimates of retail prices of a can of beer, and assumption of retailer and wholesaler margins.
Source: Euromonitor, DBS estimates, Companies
Note: Figures above beer can pictorial are estimated market
share in volume terms
Excise tax per can Tax as % of estimated retail price
Cambodia
Myanmar
56.0% 24.1% 8.8%
14.6% 13.9% 12.0%
31.7% 19.5% 16.9%
28.4% 17.8% 11.1%
US$0.13 25.1%
US$0.33 39%
US$0.57 28.3%
US$0.15 30%
25.1%33.1% 7.5%
US$0.64 45%
US$0.13 13.3%
US$0.25 18.7%
48.8% 26.2% 10.4%
US$0.30 30%
80.0%
Legend
12. Industry Focus
ASEAN Consumer: Food for thought
Page 12
Singapore – Seeking sustainable earnings (Alfie YEO)
Latest developments
Area of focus Details/Comments
July retail
sales
July retail sales (ex motor vehicles) increased 0.8% y-o-y, driven by spending in departmental stores (+3.0%), recreational
goods (+3.7%), telecommunications apparatus and computers (+6.4%), medical goods (+9.9%) and watches & jewellery
(+11.7%). Including motor vehicles, retail sales would have improved 5.2% y-o-y as vehicle sales rose 40.6%. F&B sales
declined 3.2% y-o-y, dragged by restaurants (-3.5%).
Grocery retail
eCommerce
RedMart secured US$26.7m in a round of funding from existing shareholders to launch an on-demand marketplace as well
as to expand its own private label for dry and fresh goods. It has also attracted Far East Organisation’s Far East Ventures as a
new investor. Meanwhile Honestbee.com and NTUC Fairprice have partnered to offer next hour delivery of online orders.
Source: DBS Bank
Review & what to look out for. The recent results for the
quarter ended June 2015 generally saw more Singapore
listed consumer companies reporting disappointing earnings.
As anticipated, SUPER, F&N, OSIM and PETRA missed our
forecasts, while SSG (resilient earnings) and COURTS
(bearish expectations) met our estimates. Weak regional
currencies, political and weather instability in parts of Asean,
macro headwinds, rising household debt, and poor
consumer sentiment continue to play out. This has
prompted further de-rating and softness in share prices.
Monitor for more sustained earnings recovery. Valuations
have priced in weak earnings and stocks are beginning to
look attractive. We continue to be cautious, with an eye out
for more concrete signals of earnings turnaround before
turning positive on the sector. While valuations have
corrected from 25x to 19x PE since mid 2014, we are
mindful that further earnings cuts from further lacklustre
results may bring valuations back up to higher levels. We
prefer more resilient staple plays - SSG, DFI - over PETRA,
F&N, OSIM, DELM, THBEV, DELM, COURTS.
Singapore retail sales (ex motor vehicles) Singapore grocery retail sales
Source: Thomson Reuters Datastream, DBS Bank Source: Thomson Reuters Datastream, DBS Bank
Singapore F&B retail sales Singapore real wages
Source: Thomson Reuters Datastream, DBS Bank Source: Thomson Reuters Datastream, DBS Bank
2011 2012 2013 2014 2015
-4
-2
0
2
4
6
8
%YoY
RSI - EX MOTOR VEHICLES
2011 2012 2013 2014 2015
-4
-2
0
2
4
6
REAL MTHLY WAGE
F&B sales on
downward trend
possibly due to weak
macro economic
factors.
Singapore’s retail
sales remain
sluggish
13. Industry Focus
ASEAN Consumer: Food for thought
Page 13
Malaysia – Sluggish prospects (CHEAH King Yoong )
Latest developments
Area of focus Details/Comments
IPI Malaysia’s industrial production index (IPI) rose at a faster pace of 6.1% in July from a year ago, which exceeded
economists’ survey of 5% growth, underpinned by the manufacturing sector.
Interest rate maintained As expected, Bank Negara Malaysia (BNM) kept the Overnight Policy Rate (OPR) unchanged at 3.25% at the Sept
Monetary Policy Committee meeting. BNM emphasised that the current downside risks to domestic economic
growth have risen amid greater uncertainty on both the global and domestic fronts.
Retail sales Malaysia Sales of Malaysian retail industry declined by 11.9% y-o-y in 2Q15, the worst quarterly retail growth rate since the
1997/98 Asian Financial Crisis.
Source: AllianceDBS
Review & what to look out for. The data released by Retail
Group Malaysia (RGM), an independent retail research firm,
showed that sales of Malaysian retail industry dropped
sharply by 11.9% y-o-y in 2Q15, the worst quarterly retail
growth rate since the 1997/98 Asian financial crisis. With
the dismal performance in the 2Q15, RGM has cut its 2015
retail sales forecast for Malaysia to 3.1%, compared to its
earlier forecast of 4%. This was fourth time that the
independent retail research firm lowered its forecast for
2015. RGM now expects industry sales to grow by 2.5% in
the 3Q and 6% in 4Q.
On the other hand, 2Q15 consumer sentiment index fell
further by 0.9 points to a six-year low of 71.7 (1Q15: 72.6),
indicating continued sluggish consumer spending in the
coming quarters as consumers remain wary of the future
and are now more cautious due to rising cost of living. This
has reaffirmed our ground checks that consumer spending
and visitations to shopping malls have yet to recover to pre-
GST levels, despite more than five months have passed since
the GST implementation in early April. This indicates that
sumer sentiment remains weak and it may take longer than
expected for consumer spending to recover.
Although the recently concluded 2QCY15 results largely
came within expectations, we anticipate earnings prospects
of the sector to be sluggish in the near term due to (1)
slower consumer spending, (2) weakening Ringgit could
inflate imported cost of materials, and, (3) an increasingly
competitive operating environment. In view of the
uninspiring near-term earnings prospects and potentially
slower than expected consumer recovery, we continue to
remain cautious in the near term prospects of the consumer
sector.
14. Industry Focus
ASEAN Consumer: Food for thought
Page 14
Malaysia Consumer Sentiment Index Malaysia private consumption growth
Source: MIER, Bloomberg Finance L.P. Source: Thomson Reuters Datastream
Malaysia food, beverage and tobacco retail sales Malaysia retail trade index
Source: Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
2011 2012 2013 2014 2015
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
PRIVATE FINAL CONS. EXP : Malaysia
2011 2012 2013 2014 2015
2
4
6
8
10
12
14
RETAIL TRADE INDEX : Malaysia
%YoY
40
50
60
70
80
90
100
110
120
130
Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15
Consumer Sentiment Index: Malaysia
Sentiment remains
weak and index slipped
further to 71.7 in June
reading, from 72.6 and
83 in Mar’15 and
15. Industry Focus
ASEAN Consumer: Food for thought
Page 15
Thailand – Stimulus measures raise hopes sentiment will recover (Namida Artispong)
Latest developments
Area of focus Details/ Comments
Political On Aug 17, a bomb exploded at the Erawan shrine near the Ratchaprasong intersection, resulting in several fatalities
and injuries.
Economic data The government will introduce three new stimulus measures worth a combined Bt136m to boost the economy: i) loans
worth Bt60bn for low-income earners, (ii) Bt36bn budget for nationwide construction and repair works, and (iii)
accelerate budget (Bt40bn) disbursements for small projects that cost below Bt1m each.
Corporate
development
CPF announced a share buyback program for up to 400m shares (5.2% of shares outstanding) at a total cost of up to
Bt10bn. The buyback period will be from September 10, 2015 to March 9, 2016.
Source: DBS Vickers
2Q15 results review. Most of the Thai consumer counters
reported 2Q15 results that were in line, except CPF and TUF.
CPF blamed its disappointing results on slow domestic
consumption, weak exports, and slimmer margins, while TUF
beat market estimates on higher-than-expected gross
margins.
Outlook & what to look out for. In the past two months,
Thailand has experienced both bad and good moments. The
bomb incident at the Erawan shrine affected Thailand badly
because it occurred in a tourist hotspot in Bangkok’s city
center and involved international tourists. But the military
government had acted swiftly and made several arrests
related to the bombing and has the situation under control,
suggesting things should normalise soon.
Thailand Consumer Confidence Index Thailand retail sales growth
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
Thailand private consumption (Food, F&B, leather) growth Thailand private consumption (Food) growth
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
2011 2012 2013 2014 2015
65
70
75
80
85
CONSUMER CONFIDENCE : Thailand
2011 2012 2013 2014 2015
-20
-10
0
10
20
30
40
50
60
1Y % change of RETAIL SALES INDEX : Thailand
CCI dipped further to
72.6 in August, from
76.6 in Apr and peak
of 81.1 in Dec’14.
16. Industry Focus
ASEAN Consumer: Food for thought
Page 16
On a positive note, the Cabinet has recently approved three
stimulus measures worth Bt136bn to boost the economy.
These measures are the first phase of a larger stimulus
package proposed by the government, and are quick ways to
boost purchasing power of farmers and low-income earners.
The second phase, aimed at helping small- and medium-size
enterprises (SME), will be announced shortly.
For the next (3Q15) results season, food producers CPF and
TUF are expected to report stronger core results q-o-q
because of seasonality and higher product prices. Swine
prices had risen to Bt70.5/kg in August from Bt66 in April,
while broiler price was stable at Bt37/kg. Tuna price also rose
to USD1,500/ton in Aug from USD1,100 in 1Q15.
For food-related/ hospitality players under our coverage,
MINT and CENTEL should post weaker results q-o-q because
of the low season for hotels, but earnings should grow y-o-y.
We expect SSSG (same store sales growth) for MINT and
CENTEL to edge down amid weak domestic consumption,
but their food margins should improve as MINT has a more
optimal cost structure and CENTEL would have benefitted
from the closure of unprofitable outlets and effective cost
control. Meanwhile, commerce (retail) stocks will continue to
be pressured by lingering weak domestic consumer
sentiment. We expect food staple retailers like CPALL to
perform better than retailers of discretionary items.
Although CPF should perform better in 2H15 on recovering
meat prices and a weaker Baht, we are still concerned about
several lingering issues: weak domestic purchasing power,
weak export volumes, slow recovery from EMS infection in
the aqua unit, and muted outlook for its overseas
operations, especially in Turkey (oversupply) and Malaysia
(unresolved EMS infection in shrimps). Meanwhile, MINT
could see near-term upside potential from the acquisition of
the remaining eight Tivoli hotels and sale of new real estate
units in 2H15.
Stock pick: CPALL (BUY, THB55.0). CPALL’s operations
should be resilient as food is a staple product, consumers
tend to spend on small ticket items when consumption
slows down, and CPALL’s wide network offers convenient
access to its products. SSSG should improve further in 2H15,
boosted by the new stamp campaign which will run from
July to November. Earnings growth is expected to be strong
(+28% FY15F, +22% FY16F), driven by aggressive
expansion and fatter margins from a larger share of ready-
to-eat food (high-margin), declining MAKRO acquisition
expenses, and smaller interest expense.
17. Industry Focus
ASEAN Consumer: Food for thought
Page 17
Indonesia – Not expecting major turnaround in 2H (Edwin Lioe/ Edward Tanuwijaya)
Latest developments
Area of focus Details/ Comments
GDP and inflation
data
2Q15 GDP growth came in weaker than expected at 4.67% y-o-y, vs. 4.71% observed in 1Q15. That brought first half
2015 GDP growth to only 4.7% and prompted the Central Bank to revise down its full year growth target to 4.7-5.1%
from the previous 5.0-5.4% (in line with DBS’ forecast of 4.8%).
August annual inflation was 7.18% y-o-y, easing slightly from 7.26% y-o-y in July. However, core inflation crept up
slightly to 4.92% y-o-y from 4.86% y-o-y the month before. Overall, the lower than expected August inflation (c.7.4%
expected) gave slight relief to policymakers amid the already slowing demand and deterioration of consumers’
purchasing power.
Government
stimulus package
On 9 September, President Jokowi announced the Economic Stimulus Package #1 which aims to spur real estate sector
forward, support micro, SME & cooperative businesses and protect mass market consumers. Gov’t is preparing to revise
or deregulate 89 (out of 154 proposed regulations). The stimulus announcement lacks execution details to get the plans
moving and these policies are not quick fixes (as benefits and improvements can only be only seen in the mid term). The
Economic Stimulus Package #2 and #3 are expected to be released by end of Sep 2015.
One of the policies mentioned in the stimulus package that was already effective on 6 August 2015 is the raising of
threshold on taxable income to spur consumer spending:
- Temporary workers: Rp300,000/day from Rp200,000/day
- Permanent workers: Rp36mn/year from Rp24mn/year
- However, the proportion of taxpayers in Indonesia is less than 10% of the population; therefore we think the
impact of this policy will be minimal.
Source: DBS Vickers
Review. In our previous Food for Thought issue (dated 23 Jul
2015, “Reality bites”), we cited concerns that 2Q results
could show weakness despite the coming Lebaran period
(mid-July) that typically boosts consumer spending. In
retrospect, our concerns materialised: Indofood CBP saw a
mediocre y-o-y sales volume growth for its instant noodles,
Bogasari’s wheat flour sales was relatively flat y-o-y as
demand decelerated, and Unilever’s revenue was flat y-o-y
despite price increases in September 2014 and March 2015,
implying a decline in sales volume.
For retailers, performances were relatively better. Matahari
Department Store posted better-than-expected SSSG of
17.8% for 2Q, higher than the 5.4% in 1Q, as Lebaran
season fuelled consumer discretionary spending. Mitra
Adiperkasa saw SSSG at 5%, flat from 1Q.
What we expect for the rest of the year. We maintain our
cautious view. For 3Q15, we expect both consumer and
retail companies to deliver slower sales performance as
consumer spending eases off post-Lebaran. On a y-o-y basis,
we also expect sales volume to be weaker as we believe
consumer sentiment has not shown meaningful recovery
and will likely to be dampened heading towards the end of
the year. Retail and F&B companies like Matahari and
Mayora have both indicated that they are expecting a
slower 2H15 in terms of consumer demand.
Our expectation is premised on the lack of visible
improvements from both domestic and the global economy,
which would deter personal consumptions as consumers
brace for tough times and uncertainties in future disposable
income. Persistent weakening of the rupiah, cabinet
reshuffling, wild fluctuation in prices of basic food products
are factors that in our view raised uncertainties and led to
consumers holding back their purchases.
At the time of writing, rupiah has weakened by c.16% YTD
and c.7.5% between July and mid-September alone. In our
view, companies have seen margins in the first half of this
year to be largely supported by low commodity prices.
However, at the current rate at which rupiah is depreciating,
we believe that 3Q margins would be lower than that of 2Q
and led to weaker results in both 3Q and 4Q. Note that our
in-house forecast for the rupiah is at Rp14,470 per dollar as
at the end of 2015, and Rp15,230/US$ as at 2Q16; rupiah is
currently hovering at Rp14,300 level per dollar.
Stock picks. We reiterate our cautious view on the
Indonesian consumer sector as we believe consumer
sentiment has yet to show significant recovery and that
consumer spending will likely to remain muted at least until
the end of this year. With that in mind, we believe investors
should stick to staple companies and avoid investing in retail
18. Industry Focus
ASEAN Consumer: Food for thought
Page 18
companies as demand for staple products tends to be more
resilient during a period slower economy.
We remain positive on Indofood (INDF IJ) for exposure into
Indofood CBP (ICBP IJ) which is a good proxy to Indonesia’s
rising consumption trend. Completion of China Minzhong’s
divestment would be a catalyst to the stock. We would
avoid Unilever Indonesia (UNVR IJ) for its overpriced
valuation given slowing growth and potential contraction in
margins as rupiah weakens.
Indonesia Consumer Confidence Index Indonesia 3-month price expectations
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
Indonesia food, beverage and tobacco retail sales Indonesia 2-wheeler sales (y-o-y change %)
-60%
-40%
-20%
0%
20%
40%
60%
80%
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
Indonesia 2W monthly sales
Source: Thomson Reuters Datastream Source: Indonesia 2W association (AISI)
Indonesia Retail Sales Index
Source: Thomson Reuters Datastream
2011 2012 2013 2014 2015
100
105
110
115
120
125
CONSUMER CONFIDENCE INDEX: Indonesia
Confidence moving
sideways
2-wheeler sales
rebounded to positive
2% growth in Aug, but
YTD sales were down
21% y-o-y
19. Industry Focus
ASEAN Consumer: Food for thought
Page 19
Philippines – Risk-reward not favourable yet (Ghia YUSON)
Latest developments
Area of focus Details/ Comments
GDP 2Q15 GDP came in at 5.6% y-o-y. Private consumption grew 6.2%. We expect household consumption to remain strong
in 2H on record low inflation. Peso depreciation should also boost OFW (Overseas Filipino Workers) household purchasing
power.
Inflation August 2015 inflation eased to 0.6%, a new low from 0.8% in July. Core inflation slowed further to 1.6%. YTD inflation
has averaged 1.7%, below the central bank's full-year target range of 2-4%. Food and Non-Alcoholic Beverage remained
low at 1.2% as rice and corn prices continue to stabilize. This may start to pick up in 4Q due to El Niño.
Source: DBS Bank
Review & what to look out for. Phil consumer counters in
our universe continue to underperform the index YTD,
mainly due to lacklustre earnings in 1H15. For 2Q15, we
again saw more misses than outperformers owing largely to
the usual drag items: currency weakness and supply chain
bottlenecks. We also noted some signs of domestic sales
weakness, resulting from increasing competition. Although
the sector is down 13% YTD, we feel that the risk-reward
has yet to turn more favourable as we see downside risks to
consensus estimates.
2H15 outlook. We expect earnings momentum only to
substantially recover in 4Q15. In general, 3Q has not been a
traditionally strong quarter for domestic sales (i.e. typhoon
season – we have observed that only CNPF has strong
seasonality in 3Q, given increased demand for canned
products which do not require refrigeration). 4Q15 demand
is estimated to be relatively more robust than usual; in
addition to holiday spending, we expect food expenditures
to increase as we enter the FY16 elections campaign period.
(4Q15 to 2Q16).
2Q15 earnings summary (PHP m)
2Q14 2Q15 y-o-y chg
CNPF 398.3 497.4 25% Beat
EMP 1,341.1 1,860.0 39% Miss
JFC 1,389.8 1,412.5 2% Miss
URC 2,387.4 3,103.8 30% Miss
PGOLD 712.8 952.2 34% In line
RRHI 806.3 1,082.2 34% Beat
Source: Companies, DBS Bank
Stock picks. We remain selective on Philippine consumer
counters, despite a more robust medium-term outlook. The
sector remains to be one of the more expensive in the
region and given downside risks to consensus estimates, we
expect de-rating to continue in the near-term. Our
preference for staples also remains unchanged; with PGOLD
as top pick among large/mid caps, trading at relatively
undemanding valuations of 17.4x/14.9x FY15F/16F PE on
15% FY14-16F earnings CAGR..
Philippines Consumer Confidence Index Philippines food retail price
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
Sentiment staged a small
rebound in Aug reading
20. Industry Focus
ASEAN Consumer: Food for thought
Page 20
Philippines beverage and tobacco retail price Philippines annual disposable income
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
1991 1996 2001 2006 2011
%YoY
Source: PSA
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
22. Industry Focus
ASEAN Consumer: Food for thought
Page 22
Macro – Economic Charts
Economic growth forecast & commentary Singapore GDP
GDP Growth (%) 2014 2015F 2016F
Singapore 2.9 1.8 2.1
Malaysia 6.0 4.8 4.5
Thailand 0.9 2.8 3.7
Indonesia 5.0 4.8 5.2
Philippines 6.1 5.7 6.1
Source: DBS Bank
Our economist has cut his growth forecasts to 1.8%/2.1% (from
2.4%/2.9%) for 2015/2016. Singapore’s manufacturing output and
export pick up are weak; labour, production costs and interest rates
are higher; while loan growth is slowing.
Source: Thomson Reuters Datastream, DBS Bank
Malaysia GDP Thailand GDP
We lowered Malaysia’s GDP on deteriorating economic outlook led by
weaker currency, depleting reserves and narrowing trade surplus and
slowdown in consumption and investment growth.
Expect GDP growth to be dragged by weak private consumption,
investment, and slower exports on softer than expected global
demand, average wage growth and consumer confidence.
Source: Thomson Reuters Datastream, DBS Bank Source: Thomson Reuters Datastream, DBS Bank
Indonesia GDP Philippines GDP
Private consumption growth moderation, poor investment growth on
rupiah weakness and shrinking exports will weigh on GDP. Consumer
and business confidence are low on anticipated rupiah weakness.
Domestic demand is robust with strong private consumption fuelled
by real income growth, and private sector investment. We expect
growth to pick up ahead of the 2016 elections.
Source: Thomson Reuters Datastream, DBS Bank Source: Thomson Reuters Datastream, DBS Bank
2011 2012 2013 2014 2015
0
2
4
6
8
10
12
14
16
GDP AT MARKET PRICES : Singapore
2011 2012 2013 2014 2015
-5
0
5
10
15
20
GDP : Thailand
2011 2012 2013 2014 2015
2
4
6
8
10
12
14
%YoY
GDP : Malaysia
2011 2012 2013 2014 2015
4.5
5.0
5.5
6.0
6.5
GDP : Indonesia
2011 2012 2013 2014 2015
3
4
5
6
7
8
GDP : Philippines
23. Industry Focus
ASEAN Consumer: Food for thought
Page 23
Inflation forecasts & commentary Singapore
Source: DBS Bank
CPI Inflation (%) 2014 2015F 2016F
Singapore 1.0 -0.2 1.3
Malaysia 3.1 2.4 3.3
Thailand 1.9 -0.6 1.8
Indonesia 6.4 6.6 6.2
Philippines 4.2 1.6 3.0
Disinflationary pressure is building up. Lower energy prices, slowing
economic growth and supply-side policy measures are weighing
down on inflation.
Source: Thomson Reuters Datastream, DBS Bank
Malaysia Thailand
We have raised inflation 2015/2016 forecasts from 2.1%/3% in
anticipation of upside to inflationary risk. Existing inflationary pressure is
higher than expected, a result of GST and fuel prices.
Source: Thomson Reuters Datastream, DBS Bank
Core inflation is trending lower on soft domestic economy and low
oil prices have led to low transport and food inflation.
Source: Thomson Reuters Datastream, DBS Bank
Indonesia Philippines
Expect higher inflationary risks on weak rupiah and higher food prices.
Source: Thomson Reuters Datastream, DBS Bank
Strong Peso, lower crude oil prices have contributed to CPI weakness.
With core inflation set to average 2% or lower, and assuming a food
price spike, inflation will be between 2-4% next year.
Source: Thomson Reuters Datastream, DBS Bank
24. Industry Focus
ASEAN Consumer: Food for thought
Page 24
Forex forecasts & commentary USD/SGD
Source: DBS Bank
Exchange Rates, eop Current 4Q15F 1Q16F
Singapore 1.42 1.42 1.43
Malaysia 4.31 4.34 4.35
Thailand 36.1 36.0 36.5
Indonesia 14,552 14,470 14,850
Philippines 46.6 47.9 48.4
The MAS continues to keep the SGD nominal effective exchange rate
(NEER) on a modest and gradual appreciation path. The policy band
may be re-centered lower at the October policy review. Our SGD is
forecast to peak at US$1.47 in 3Q16.
Source: Thomson Reuters Datastream, DBS Bank
USD/MYR USD/THB
We believe the ringgit is oversold but remains under pressure from
external and domestic pressures. We see it weakening further to US$4.37
in 3Q16.
Source: Thomson Reuters Datastream, DBS Bank
Trade and current account surpluses are high. With policies
encouraging capital outflows, we expect the baht to weaken further
as Thais are allowed to invest in overseas assets from 2016.
Source: Thomson Reuters Datastream, DBS Bank
USD/IDR USD/PHP
We believe the rupiah is vulnerable to a US interest rate hike. We see the
rupiah going towards US$15,600 by 3Q16.
Source: Thomson Reuters Datastream, DBS Bank
BSP has adopted a pro-PHP stance, reflected in its resistance to cut
rates despite a plunge in inflation. We expect Peso to weaken further
to US$49.3 by 3Q16.
Source: Thomson Reuters Datastream, DBS Bank
25. Industry Focus
ASEAN Consumer: Food for thought
Page 25
Input costs – Lower commodity prices mitigated by strengthening USD and demand headwinds
Commodity prices remain low. Ample supply and weak
demand have led to weak commodity prices this year. Most
commodities are trading at 5-year lows, cushioning any risks
of El Nino. Production and inventory levels have largely been
encouraging and together with soft demand, this has led to
favourable commodity prices. The impact to F&B companies
is not entirely positive as they currently face currency and
demand headwinds.
Challenging outlook despite low headline input costs.
Headline input costs are generally favourable. Prices of
commodities are at attractive levels. Nonetheless, any
declines are mitigated by weaker regional currencies that
have been declining against the US dollar. Outlook
continues to remain challenging as competition and weak
regional demand for consumer food products could also
lead to downward price adjustment.
Sugar Coffee
Source: Thomson Reuters Datastream, DBS Bank Source: Thomson Reuters Datastream, DBS Bank
Cocoa Palm Oil
Source: Thomson Reuters Datastream, DBS Bank Source: Thomson Reuters Datastream, DBS Bank
Milk Rice - Thailand
Source: Thomson Reuters Datastream, DBS Bank Source: Thomson Reuters Datastream, DBS Bank
2011 2012 2013 2014 2015
100
150
200
250
300
Cents/lb
Coffee-Brazilian (NY) Cents/lb
US$/MT
2011 2012 2013 2014 2015
350
400
450
500
550
600
650
700
Rice, White 100% FOB Bangkok U$/MT
2011 2012 2013 2014 2015
10
15
20
25
30
35
Raw Sugar-ISA Daily Price c/lb
2011 2012 2013 2014 2015
2000
2500
3000
3500
4000
US$/MT
Cocoa-ICCO Daily Price US$/MT
41. ASIAN INSIGHTS VICKERS SECURITIES
www.dbsvickers.com
ed: TH / sa: JC
BUY (upgrade from HOLD)
Last Traded Price: US$6.02 (STI : 2,882.27)
Price Target : US$7.34 (22% upside) (Prev US$8.54)
Potential Catalyst: Margin recovery
Where we differ: We believe share price has priced in negatives
Analyst
Alfie Yeo +65 6682 3717 alfieyeo@dbs.com
Andy Sim +65 6682 3718 andysim@dbs.com
Price Relative
Forecasts and Valuation
FY Dec (US$ m) 2014A 2015F 2016F 2017F
Revenue 11,008 11,480 11,983 12,523
EBITDA 796 718 799 858
Pre-tax Profit 601 494 528 581
Net Profit 509 412 438 483
Net Pft (Pre Ex.) 499 412 438 483
EPS (US cts.) 37.7 30.5 32.5 35.7
EPS Pre Ex. (US cts.) 37.0 30.5 32.5 35.7
EPS Gth (%) 2 (19) 6 10
EPS Gth Pre Ex (%) 5 (17) 6 10
Diluted EPS (US cts.) 37.7 30.5 32.5 35.7
Net DPS (US cts.) 23.0 23.0 23.0 23.0
BV Per Share (US cts.) 105.8 113.3 122.8 135.5
PE (X) 16.0 19.7 18.5 16.8
PE Pre Ex. (X) 16.3 19.7 18.5 16.8
P/Cash Flow (X) 12.0 12.2 13.1 11.6
EV/EBITDA (X) 9.7 12.6 11.3 10.4
Net Div Yield (%) 3.8 3.8 3.8 3.8
P/Book Value (X) 5.7 5.3 4.9 4.4
Net Debt/Equity (X) CASH 0.5 0.5 0.4
ROAE (%) 37.6 27.9 27.5 27.7
Earnings Rev (%): (1) (3) (4)
Consensus EPS (US cts.): 33.4 37.0 42.3
Other Broker Recs: B: 3 S:2 H: 5
Source of all data: Company, DBS Bank, Bloomberg Finance L.P
SQUEEZED VALUATIONS TO EVENTUALLY
REFLATE
Upgrade to BUY on compelling valuations. We upgrade our
rating to BUY with an SOTP-based TP of US$7.34. The stock
currently trades at an attractive valuation of 18.5x FY16F PE at
between -1.5 to -1SD of its 7-year mean. We believe its share
price correction of -21% since our downgrade in early August
has been overdone and has priced in structural cost challenges
as well as weaker margins going forward. Share price now
values DFI’s core business at just 18x PE.
Core business valued at -1.5SD of its 7-year mean. We find
value in DFI’s core business after stripping out the value of
DFI’s 20% stake in Yonghui’s shares and net debt. Our analysis
suggests that the current share price is now pricing DFI’s core
business at 18x FY16F PE, a deep discount to peer and
historical average PE multiple of 25x.
Growth supported by store expansion, better efficiencies. We
lower our FY16F/FY17F earnings by 3-4% to account for lower
GDP growth and weak regional currencies. Earnings growth
will still be supported by store expansion and better operating
efficiencies albeit at a slower rate. Initiatives to support growth
include more Mannings stores in Yonghui, more focus on
private labels, e-commerce, fresh/ready to eat food,
improvement in supply chain infrastructure (ie distribution
centres) and inventory management (ie IT systems).
Valuation:
SOTP valuation methodology. Our target price of US$7.34 is
derived from sum-of-the-parts valuation methodology. We
value DFI's core business at US$6.98 based on DCF and the
20% stake in Yonghui based on market value at US$0.95 and
net debt at US$0.59 per share.
Key Risks to Our View:
Significant earnings disappointment. Our upgrade is premised
on oversold valuations and a low likelihood of significant
downward earnings revision. We believe it would take a
significant earnings disappointment to derail our upside bias
on the stock. Nonetheless, our earnings forecast is
conservative.
At A Glance
Issued Capital (m shrs) 1,352
Mkt. Cap (US$m/US$m) 8,140 / 8,140
Major Shareholders
Jardine Strategic Holdings Ltd 77.6
Franklin Resources (%) 6.6
Free Float (%) 15.7
3m Avg. Daily Val (US$m) 1.5
ICB Industry : Consumer Services / Food & Drug Retailers
DBS Group Research . Equity 22 Sep 2015
Singapore Company Guide
Dairy Farm
Edition 1 Version 1 | Bloomberg: DFI SP | Reuters: DAIR.SI Refer to important disclosures at the end of this report
61
81
101
121
141
161
181
201
221
5.4
6.4
7.4
8.4
9.4
10.4
11.4
12.4
13.4
14.4
Sep-11 Sep-12 Sep-13 Sep-14 Sep-15
Relative IndexUS$
Dairy Farm (LHS) Relative STI INDEX (RHS)
42. ASIAN INSIGHTS VICKERS SECURITIES
Page 42
Company Guide
Dairy Farm
Current share price is compelling...
Valuations are attractive. Since our downgrade in early
August, DFI’s share price has corrected by -21%. We believe
a combination of factors could have contributed to the share
price decline, including poor 1H15 results, additional
investment in Yonghui, as well as parent Jardine Mahtheson
and Jardine Strategic’s removal from the STI index. The stock
now trades at 18.5x FY16F PE, representing between -1.5 to
-1SD of its 7-year mean PE. This compares attractively to peer
average of 25x.
Share price correction overdone. We believe the company's
share price correction is overdone for two broad reasons: 1)
There is value in DFI’s core business. DFI’s core business after
stripping out the value of Yonghui and net debt in DFI’s
share price is even more attractive at 18x FY16F PE and close
to -1.5SD of its 7-year mean; 2) Barring unforeseen shocks,
we do not see significant cuts in earnings despite the recent
share price correction.
Valuations at between -1.5 to -1SD of their 7-year mean
Source: DBS Bank
...even after we lower our growth rates
Trim FY16F/FY17F earnings by 3-4%. We believe the weaker
regional outlook is likely to have a negative impact on
regional consumption and store opening outlook. To a lesser
extent, we account for weaker currencies in the Indonesian
Rupiah, Malaysian Ringgit, and Singapore Dollar. We lower
our store opening outlook from 3.5% to 2.1% and SSSG
assumptions from 3.6% to 2.3%. FY16F/FY17F earnings
growth is now at a more muted 6%/10%.
Slower regional GDP growth. We note from our last update
in August that our economics desk has downgraded 2016F
GDP forecasts for most of the markets that DFI operates in.
We are now looking to a less optimistic growth environment
one month on. In China, growth is slowing on all fronts,
including investments, private consumption and exports. We
downgraded Taiwan’s growth as most of its trade is linked to
China. In Hong Kong, the retail sector is facing headwinds
from tourist spend due to the strengthening HKD (HKD is
pegged to USD), weaker Chinese tourist arrivals and slowing
of domestic spending on the back of weaker equity and
property markets. Singapore’s manufacturing output and
export pick-up are weak; labour, production costs and
interest rates are higher; while loan growth is slowing. We
lowered Malaysia’s GDP on deteriorating economic outlook
led by weaker currency, depleting reserves and narrowing
trade surplus, and slowdown in consumption and investment
growth.
2016F GDP forecasts for most DFI key markets been downgraded
Source: DBS Bank
Southeast Asian currencies have weakened against the USD.
Various currencies have weakened YTD against the USD
(DFI’s reporting and share price currency), on anticipation of
a US rate hike, which led to a stronger US dollar. Among
DFI’s key operating markets, the Southeast Asian currencies
were worse affected than North Asia’s. Indonesian Rupiah
performed the worst, depreciating by >20% YTD, followed
by Malaysian Ringgit >15%, while Singapore dollar
weakened by >5%. We estimate that the three Asean
markets (SG, ID, MY) contribute to approximately less than
half of DFI’s revenues.
SGD, MYR and IDR have weakened against USD by 5-25% YTD
Source: Thomson Reuters, DBS Bank
95
100
105
110
115
120
125
Indonesia Rupiah Malaysia Ringgit
Singapore Dollar
0
1
2
3
4
5
6
7
8
China Indonesia Malaysia Taiwan Hong Kong Singapore
GDP (%)
Old
New
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
(x)
+1sd
+2sd
Avg
-1sd
-2sd
43. ASIAN INSIGHTS VICKERS SECURITIES
Page 43
Company Guide
Dairy Farm
1H15’s structural cost increase and slower growth should be
well factored in. While revenue was in line with our
forecasts, DFI turned in disappointing earnings in 1H15 on
higher costs and lower margins, particularly over higher
rents in Hong Kong. We view the cost increase in 1H15 as
being structural, and plans to improve cost efficiencies at
distribution centres and introducing more fresh food will
take time to yield results over the longer term. Nonetheless,
we have since reduced our EBIT margin assumptions to
reflect a higher operating cost structure.
DFI’s core business valued at 18x PE, below peers and
mean valuation
Core business valued at only 18x PE. We strip out DFI’s 20%
value in Yonghui’s shares (less financing) to arrive at a value
per share for DFI’s core business and have found DFI’s core
valuation to be at 18x FY16F PE. We have adjusted EPS to
exclude potential Yonghui contribution and its related
financing costs. Our share price for the core business at
US$5.60 also takes into account that DFI’s 20% ownership in
Yonghui is financed. We believe DFI's core business looks
undervalued at 18x forward PE, given that peer and historical
average valuations are at 25x PE.
Core business valued at compelling 18x PE
US$ Note
Share price 6.02 (1)
Value/share of 20% Yonghui stake 0.95 (2)
Net debt 0.59 (3)
Core business share price 5.66 (4)=(1)-(2)+(3)
Estimated FY16F EPS (ex Yonghui) 0.32 (5)
PE ex Yonghui 18x (4)/(5)
Source: DBS Bank
We believe our earnings estimates are conservative. We
have already factored in more conservative earnings growth
going forward by lowering our margin assumption and
growth rate to more conservative levels post 1H15 results.
Therefore, downside to earnings risk is low unless earnings
disappoint significantly.
1) In view of the poorer 1H15 operating environment, we
have already lowered our FY15-FY17F EBIT margin
assumption from 4.8-5% to 3.7-4%. So, low margins
should not come as a surprise hereon;
2) We have kept FY16F earnings growth muted at 6.3%.
Our revenue growth is conservative at 4.4% and EBIT
growth is at 11.4% y-o-y on improving sales mix. But
higher interest cost to finance the Yonghui acquisition is
expected to hamper better sales mix. We understand
that the financing rates for the US$925m needed to
acquire Yonghui are “very attractive”, yet undisclosed.
There could be some upside to earnings if the actual
interest rates turn out better than our assumptions;
3) Our earnings estimate is the lowest on the street.
Current valuation of 18.5x FY16F PE based on our
below-consensus earnings estimate is not excessive.
More specifically, our FY15F/FY16F earnings are
US$412/US$438m vs Bloomberg earnings estimates
(excluding our numbers) of US$431-477m for FY15F
and US$466-499m for FY16F.
Minimal impact on additional share subscription in
Yonghui
Recently spent an additional US$210m to maintain its
19.9% stake in Yonghui. On 7 August 2015, DFI subscribed
for an additional 143.5m shares in Yonghui for about
US$210m. This came about as JD.com acquired a 10%
stake in Yonghui for about US$700m in a new share
placement. DFI had already invested US$925m for a 19.9%
stake earlier this year and now finds itself needing to invest
an additional US$210m to preserve its 19.9% stake.
Minimal impact to earnings and net debt, in our view.
Similar to the US$925m tranche, we believe DFI will also be
funding this additional US$210m investment through bank
borrowings. We understand that the borrowing rates to
fund DFI’s initial Yonghui acquisition were “very attractive”,
and based on our analysis, we assess that the overall impact
on additional interest cost is minimal.
Cooperation with JD.com allows Yonghui to enter e-
commerce space. Yonghui’s placement will raise
approximately US$1.05bn (US$210m from DFI, US$700m
from JD.com, and US$140m from Yonghui’s Chairman
Zhang Xuansong). The cooperation with JD will help
Yonghui to expand into the e-commerce space in China.
The additional capital will facilitate investments in an
integrated online-to-offline business model, store
development and expansion plan, to build a leading food
supply chain in China.
44. ASIAN INSIGHTS VICKERS SECURITIES
Page 44
Company Guide
Dairy Farm
Upgrade to BUY
Upgrade to BUY, TP S$7.34. We upgrade our rating on DFI
to BUY with an SOTP-based TP of US$7.34. Current
valuation (of 18.5x FY16F PE) is attractive at below -1SD of
its 7-year mean and also at a discount to peer average. The
value of DFI’s core business is debt free and cash generative.
So we continue to view it as being debt free in our DCF
valuation methodology (valued at US$6.98/share, t=3.6%,
WACC=8.3%). Share price is also supported by its 20%
investment in Yonghui, which accounts for US$0.95 per DFI
share at current market value. However, since the Yonghui
stake is financed by bank borrowings, we reduce Yonghui’s
market value by its net debt (valued at US$0.59/share). Based
on the value of its core business, Yonghui and net debt
combined, we derived a TP of S$7.34.
SOTP-based TP values DFI at US$7.34
Per share US$
Value of core business (w/o debt) –DCF 6.98
Value/share of 20% Yonghui stake 0.95
Less: net debt 0.59
TP 7.34
Source: DBS Bank estimates
Peers trade at an average of 22-25x PE
Source: Thomson Reuters, DBS Bank
Company Rating Country
Market
Cap
(S$m) Px Last PE (Act) PE (Yr 1) PE(Yr 2)
P/BV
(x)
P/Sales
(x)
ROE
(%)
Operating
Margin
(%)
Net
Margin
(%)
Div idend
Yield
(%)
DairyFarm Intl Buy SGX 11,395 6.02 19.7x 18.5x 16.8x 4.9x 0.7x 27% 3.8% 3.7% 3.8%
South East A sia Peers
CP ALL Buy SET 17,456 49.50 34.2x 28.0x N/A 10.8x 1.0x 41% 6.3% 3.6% 2.5%
Big CSupercente Hold SET 6,477 199.50 20.6x 17.7x N/A 3.0x 1.1x 18% 8.3% 6.3% 1.7%
Siam Makro Not rated SET 7,306 38.50 35.3x 32.4x 28.1x 13.8x 1.2x 52% 4.0% 3.4% 2.0%
Puregold Buy PSE 2,636 31.80 17.5x 15.0x N/A 2.0x 0.8x 14% 7.6% 5.3% 1.2%
Matahari Putra Not rated IDX 1,169 2,170 22.9x 20.6x 18.4x 4.3x 0.9x 24% 4.6% 4.1% 1.6%
Sumber Alfaria Not rated IDX 2,257 585 45.7x 39.3x 31.9x 5.4x 0.5x 27% 2.1% 1.3% 0.7%
PSC Not rated PSE 1,447 105 53.1x N/A N/A 13.9x 2.5x 43% -7.5% 5.1% 0.3%
Sheng Siong Buy SGX 1,270 0.83 23.7x 21.2x 21.1x 5.1x 1.5x 24% 7.7% 7.1% 4.2%
Hero Supermarket Not rated IDX 629 1,550 nm nm nm 1.2x 0.4x 1% -1.4% 0.3% N/A
7 Eleven Buy KLSE 603 1.48 24.1x 20.1x N/A 5.7x 0.7x 31% 4.7% 3.7% 2.5%
Modern Internasi Not rated IDX 81 182 34.0x 24.9x 26.8x 0.6x 0.6x 5% 8.2% 2.8% N/A
Midi Utama ID Not rated IDX 210 750.00 N/A N/A N/A N/A N/A 31% N/A N/A 1.9%
Regional av erage 21.1x 24.3x 25.3x 6.0x 1.0x 26% 4.1% 3.9% 1.9%
Ex-Indonesia av erage 29.8x 22.4x 24.6x 7.8x 1.3x 32% 4.4% 4.9% 2.1%
45. ASIAN INSIGHTS VICKERS SECURITIES
Page 45
Company Guide
Dairy Farm
CRITICAL DATA POINTS TO WATCH
Earnings Drivers:
Store expansion, better products driving top-line growth. Our
outlook for top line is modest, driven by store expansions and
enhanced product offerings. We expect more products for
customers in the form of ready-to-eat food in convenience
stores and private labels for Supermarkets and Health & Beauty
stores. 7-Eleven and Health & Beauty stores continue to grow
in South China and Vietnam. IKEA has plans to open another
store in Indonesia. Cooperation with Yonghui will also see
Mannings stores open in Yonghui’s premises.
Fighting to improve margins. We see profitability coming down
due to higher rents and labour costs, and weaker currencies vs
USD. Higher rents in Hong Kong formed a large part of the
operating cost increase in 1H15. Competition and food price
erosion at the supermarket/hypermarket level has also led to
lower gross profit for DFI. Nonetheless, DFI continues to
improve efficiency in its operations in its bid to fight margin
pressure.
Higher margins through fresh food and private labels.
Concentration towards more fresh food has started, especially
in Indonesia, in a bid to deliver higher margins. There will be
more cooperation with Yonghui for more fresh food to be
brought into Singapore, Philippines and Malaysia. Private label
programme will support higher margins in Health & Beauty
and Supermarket & Hypermarket segments, and at the
convenience stores, more ready-to-eat meals.
Strengthening operations. We see DFI strengthening its
operations regionally for the long term, with much of the focus
geared toward improving operating efficiencies. Areas include
e-commerce, IT infrastructure, supply chain, and food and
product safety. Growth will be supported by private label
programme, new distribution centres in Malaysia and
Singapore, and new stores (second IKEA store in Indonesia and
expansion of 7-Eleven stores and Mannings in China).
Synergies with Yonghui taking shape. We expect more
synergies with increased collaboration in the sharing of food
supplies. These include sharing suppliers and accessing
Yonghui’s fresh supply chain for Singapore, Malaysia, Hong
Kong and Philippine stores. It is also beginning to discuss on
the sale of private labels in Yonghui stores (which do not have
health and beauty offerings), and the opening of Mannings
store in Yonghui will be another area for cooperation.
Number of outlets
Sales per store blended
Segment revenue 2014
EBIT margin (%)
Gross margin (%)
Source: Company, DBS Bank
4,908
5,220 5,331 5,446 5,562
0
700
1,400
2,100
2,800
3,500
4,200
4,900
5,600
2013A 2014A 2015F 2016F 2017F
2.11 2.11 2.15 2.2 2.25
0.00
0.46
0.92
1.38
1.84
2.30
2013A 2014A 2015F 2016F 2017F
Food
73.7%
Home
furnishings
stores
4.5%
Health &
beauty stores
21.8%
3.0
3.5
4.0
4.5
5.0
5.5
2013A 2014A 2015F 2016F 2017F
29.0
29.2
29.4
29.6
29.8
30.0
2013A 2014A 2015F 2016F 2017F
1H15 margins
disappointed by
higher rents in HK,
labour and regional
currencies vs USD.
1H15 margins
dragged by higher
food price deflation,
shrinkage costs
from fresh food.
46. ASIAN INSIGHTS VICKERS SECURITIES
Page 46
Company Guide
Dairy Farm
Balance Sheet:
Net debt mitigated by strong operating cashflows. DFI has net
debt of US$589m as of 1H15 vs net cash of US$475m in FY14.
The net debt arose primarily from the financing for its 20% stake
in Yonghui Superstores. DFI’s business generates strong
operational cash flows to the tune of over US$600m a year. We
therefore believe that it will be more than capable of paring
down the debt in the next few years.
Share Price Drivers:
Earnings turnaround. We believe share price upside will be driven
by any earnings recovery. At this juncture however, valuations
have fallen below peer and historical average of 25x levels which
we believe is attractive. We have priced in a more conservative
earnings growth and believe slower regional GDP growth,
weaker currencies and lower margin structure have been
accounted for in our earnings estimates. Should operational
efficiencies be achieved faster than expected, margin recovery
will support earnings recovery as well. Repayment of Yonghui
debt and reduction in interest costs will also be favourable to
earnings growth.
Cooperation with Yonghui may drive long-term share price. We
are positive on DFI’s Yonghui investment because the partnership
with Yonghui provides a good platform to scale up DFI’s business
in China. Longer-term opportunities include exposure to China’s
modern grocery retail consumption, more Mannings stores and
better supply of products to each other.
Key Risks:
Profitability susceptible to rental and labour costs. As a retailer,
labour and rental costs are key operating cost components.
Significant changes in these components will affect earnings
growth. Higher rental costs were seen in Hong Kong in 1H15,
which resulted in lower margins.
Competitive pressure. Grocery retail customers can be price
sensitive and may switch to retailers which offer more
promotions. This can be a risk to market share, sales and
earnings growth. In times of weaker consumer sentiment,
customers may trade down from high-end supermarkets to the
mass-market segment. DFI has already lost market share to
Sheng Siong in Singapore in the mass-market supermarket space.
COMPANY BACKGROUND
Dairy Farm is a Pan Asian retailer, operating over 6,400
supermarkets, hypermarkets, health and beauty stores,
convenience stores, home furnishing stores and restaurants
under well-known brand names in Hong Kong, Taiwan, China,
Macau, Singapore, India, Philippines, Cambodia, Brunei,
Malaysia, Indonesia and Vietnam.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
2.1
2.2
2.3
2.4
2.5
2.6
2.7
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
2013A 2014A 2015F 2016F 2017F
Gross Debt to Equity (LHS) Asset Turnover (RHS)
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
2013A 2014A 2015F 2016F 2017F
Capital Expenditure (-)
US$
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
2013A 2014A 2015F 2016F 2017F
Avg: 29.7x
+1sd: 33x
+2sd: 36.2x
‐1sd: 26.5x
‐2sd: 23.3x
17.0
22.0
27.0
32.0
37.0
42.0
Sep-11 Sep-12 Sep-13 Sep-14
(x)
Avg: 11.32x
+1sd: 13.63x
+2sd: 15.94x
‐1sd: 9.01x
‐2sd: 6.7x
4.9
6.9
8.9
10.9
12.9
14.9
16.9
Sep-11 Sep-12 Sep-13 Sep-14
(x)
