by winston » Tue Aug 12, 2014 9:19 am
Further headway into China
DFI SP / DAIR.SI | HOLD - Maintained | US$10.17 /TP US$10.60
Mkt.Cap:US$13,751.00m | Avg.Daily Vol:US$2.38m | Free Float:22.00%
Unlike its rivals, Dairy Farm has always resisted opening its flagship supermarket/hypermarket format in China. However, seven years after its acquisition of 110 Quik convenience stores from Lianhua, the group is increasing its exposure to the Chinese consumer via its proposed acquisition of a ~20% interest in Yonghui Superstores.
On balance, we are marginally positive on the investment as Yonghui is a quality operator.
Furthermore, growth in North Asia could offset the Southeast Asia drag. The seemingly pricey investment cost is a con. Nonetheless, if Yonghui achieves its growth targets (this time with Dairy Farm’s help), this is an investment which could make sense by 2015. Pending the completion of the transaction, we keep our FY14-16 forecasts and residual income-based target price. Maintain Hold.
What Happened
Dairy Farm has agreed to acquire 19.99% interest in Yonghui Superstores (601933 CH, Not Rated) for approx. US$925m or Rmb7/share. It has also entered into a business co-operation with Yonghui. The two groups will collaborate on areas such as procurement, private label product development, fresh food processing and store development.
Pending the approval of the transaction (which could take six months to complete), Dairy Farm will have the right to nominate two directors to the board of directors and one member to the supervisory board. Dairy Farm will fund the investment with its internal cash and new borrowings. The group is in a net cash position of US$568m.
What We Think
On balance, we are marginally positive on the investment, though we think that the investment cost seems pricey, especially on a trailing basis. Dairy Farm’s investment cost values Yonghui at 0.9x trailing EV/sales, in line with the average of previous M&A transactions in the sector.
However, considering the profitability matrices, the investment values Yonghui at a trailing EV/EBITDA of 18.2x and P/E of 39.5x, which can be considered pricey by its own right. Recall that Big C acquired Carrefour Thailand for US$1.2bn in Nov 2010, or at 13x trailing EV/EBITDA.
Nonetheless, if Yonghui achieves its growth targets (this time with the help of Dairy Farm), the investment could make sense by 2015. Based on Bloomberg consensus, the investment values Yonghui at 21x CY15 P/E and 9x CY15 EV/EBITDA (in line with peers’ average).
What You Should Do
Maintain Hold. We would be buyers with conviction at US$9.20/share, which is the group’s estimated break-up value.
Previous "Dairy Farm Int'l" reports...
1/8/14 Co.Results Southeast Asia continues to drag (HD, US$10.69 /TP:10.60)
10/3/14 Co.Results Turning the corner (AD, US$9.13 /TP:10.60)
15/1/14 Co.Flash Pan-Asian retail franchise at break-up value? (AD, US$9.50 /TP:11.90)
Source: CIMB
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