How Dairy Farm is milking tons of benefits from Asia's ageing population

Health and beauty spending is growing.

According to Macquarie Research, DFI’s twin engines of growth, Food - super/hypermarkets (40% of 2012 PBIT) and Health and Beauty (H&B, 31%) are not firing in tandem.

Limited store expansion opportunities and sustained wage inflation impede super/hypermarket growth. On the other hand, rising disposable income and ageing demographics should continue to propel H&B spending and expand margins.

Here's more from Macquarie Research:

Overall, we see DFI growing its earnings at a 13% CAGR (2013-17E).

DFI has improved its ROIC 9 times over the last 11 years, from 8% to 99%. Its 5-yr average cash conversion cycle and free cash flow conversion are: 60 days and 80%.

It has paid special dividends 3 times over the last 10 years. Sitting on a net cash position of US$421m, a special dividend is highly possible, we think.

H&B is the key earnings growth driver. According to Euromonitor, DFI’s H&B growth markets only spend c.1-3% of their expenditure on H&B, a stark contrast to Japan at 5%. Rising wages, coupled with ageing demographics, could boost sales/store by an 8% CAGR over 2012-17E by our estimates.

Management’s focus to expand its network in S. China is also likely to see healthy store expansion starting in 2014. Our bull case scenario (+120 stores/yr in China) adds 80 UScts to our target price.

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