DAIRY FARM | BUY
TARGET PRICE: US$8.50
JAN 12 CLOSE: US$7.27
RHB, Jan 12
We believe Dairy Farm is on the right track, with the implementation of strategic initiatives to improve margins and operational efficiencies. These would help to achieve profitability, which would be evident in the upcoming release of its 2016 results.
With retail sales in its bread-and-butter market, Hong Kong, appearing to have bottomed out, we believe things should look up.
Management has been pushing to increase the penetration of fresh food sales, which we believe would lead to a favourable change in the margin structure.
Along with the push towards more direct/bulk buying, and IT infrastructure investments, we believe there is potential for margin upside in the medium term. The company shut its Starmart business in Indonesia and started rationalising its 7-Eleven stores here during 2016.
With the earlier rationalisation and country management changes in China, overall sales and profitability at this division seem to be improving.
The Hong Kong market contributed an estimated 40-45 per cent of group revenue.
Retail sales were weak last year. However, this situation appears to have bottomed out towards end-2016.
Key risks include weaker regional currencies versus USD.
Expected US rate hikes could result in further depreciation of regional currencies vis-a-vis USD, which is bad for Dairy Farm as 55 per cent of revenue is derived from outside Hong Kong.
GOLDEN ENERGY AND RESOURCES | BUY
TARGET PRICE: $0.95
JAN 12 CLOSE: $0.51
KGI, Jan 12
We initiate Golden Energy and Resources (Gear) with a BUY recommendation and a target price of $0.95 based on our DCF valuation (WACC 12.5 per cent, long-term growth 0 per cent).
We expect improving operational performance and plans to raise coal production to 14 million tonnes in FY17F (+40 per cent yoy) to help lift FY17 earnings growth significantly.
Gear's crown jewel is its BIB mine in South Kalimantan, Indonesia, that makes up 95 per cent of our total valuation of the group. It is near the coast and has a low stripping ratio, enabling it to achieve similar margins to peers with higher quality coal.
Its large reserves enable it to tender to supply coal to domestic power plant projects which require 20-25 years of supply.
Gear's ASP typically lags coal benchmark prices by around three months due to the nature of its contracts. Ecocoal, the closest benchmark in Indonesia to GEAR's coal, has risen by 70 per cent yoy last month. We can expect this to filter down to GEAR's ASP starting Q117.
Overall coal demand is still expected to be high. Demand shift to Asia from the US and Europe is accelerating, thus benefiting strategically located Indonesian coal miners such as Gear.
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