Business

Brokers' take

Compiled by Lynette Tan

DAIRY FARM

NEUTRAL

TARGET PRICE: US$6.63

SEPT 23 CLOSE: US$6.81

RHB Research Institute, Sept 23

While contribution from the health & beauty business should still be Dairy Farm's main driver for FY2019-2020F earnings, we remain cautious on the outlook amid ongoing protests in Hong Kong.

Based on data provided by the Census and Statistics Department of Hong Kong, retail sales in June and July fell 7 per cent and 11 per cent. We estimate that about 70 per cent of Dairy Farm's FY2018 operating profit was derived from Hong Kong, therefore, ongoing protests there are likely to impact retailers, especially those located in Causeway Bay, near the rallying point for protests.

Sales from the health & beauty segment are also exposed to tourism spending. Even as the protests taper down in size, we expect the downward pressure on Hong Kong medicine and cosmetics sales to persist in Q4 2019 as tourist arrivals from Mainland China are likely to decline.

We cut our earnings forecast by 2 per cent for FY2019-2021F as we expect potential decline in Hong Kong sales, partially offset by improving sales for its Manning stores in China and Guardian stores in Asean. We also reduced our discounted cash flow (DCF) terminal growth rate to 2 per cent from 2.5 per cent on the back of a weakened economic outlook for Hong Kong following the civil unrest. This lowered our DCF-derived target price to US$6.63 from US$7.38 previously.

SINGAPORE EXCHANGE

HOLD (DOWNGRADED)

TARRGET PRICE: S$9.00

SEPT 23 CLOSE: S$8.29

Jefferies, Sept 23

The exchange has invested more than $350 million in various companies involved in the fixed income, currencies, and commodities (FICC) space; it also launched SGX BondPro for trading bonds in 2015.

However, an estimated 75 per cent of revenue is still derived from equity and equity derivative products.

Management intends to diversify the mix at a faster pace. The proportion of non equity-linked revenue (FICC and Data and Connectivity) is expected to double within the next five years.

Our thesis remains unchanged.

We like the fact the exchange has near-monopoly position in certain products, un-correlated revenue streams, underwritten minimum dividend generated from operating cash flows and un-levered balance sheet.

New investments and financial flexibility from net cash position provide an upside optionality.

But after a roughly 19 per cent year-to-date rally, price-to-earnings multiples are at cycle means, leaving only 5 per cent potential upside (9 per cent total return) from our target price of $9. Therefore, we downgrade to Hold.

Disclaimer: All analyses, recommendations and other information herein are published for general information. Readers should not rely solely on the information published and should seek independent financial advice prior to making any investment decision.

The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

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