“In terms of valuation the stock is now trading at 22x FY19F P/E, similar to the peer average,” she adds.
While Dairy Farm’s Health & Beauty segment continued to deliver stellar results in 1Q19 across most markets, Cai warns that the segment could see slower growth in 2H19 – if consumer sentiment worsens amid rising geopolitical tensions.
“We note that total medicines and cosmetics retail sales in the Hong Kong market only grew 2.3% y-o-y in 1Q19,” Cai says. “Moreover, consumer confidence in Mainland China seemed to have been impacted by the US-China trade war, with retail sales growth slowing more than expected to 7.2% y-o-y in April 2019.”
The trade tensions are also expected to cap growth from Dairy Farm’s associates.
For instance, consensus is still bullish on the performance of Dairy Farm’s 20%-owned Yonghui, which registered a 38% growth in its core PATMI.
Cai says the escalation of US-China trade tensions and the resulting depreciation of the Chinese yuan] could cap its contribution to Dairy Farm, when translated to the group’s reporting currency, the US dollar.
“[Dairy Farm’s] share price is likely to stay rangebound,” Cai says, adding that investors should “wait for bargain sales”.
As at 3pm, shares in Dairy Farm are trading 1.5% down at US$7.71. This implies an estimated price-to-earnings (PE) ratio of 21.6 times and a dividend yield of 2.8% for FY19F.
