?Dare to compare? has been a promotional tagline used by the Giant chain of hypermarkets. That same slogan of the mass retailer which is part of listed Dairy Farm International, has inspired CIMB Research to delve into the operations of the retail conglomerate for a comparison against its regional peers.

Part of that inspiration also came from the fact that Dairy Farm?s stock has fallen some 11% in the wake of its disappointment 1H2013 earnings result, and a total of 20% from its recent high in May. To recap, Dairy Farm?s 1H2013 earnings had fallen 5% y-o-y due to margin erosion from stiff competition in the mass-market retail segments of Malaysia and Singapore.

Although disappointing, the earnings outcome wasn?t exactly a disaster for the company. The regionally-diversified company has a dominant position in Hong Kong, where it made 51% of revenues in FY2012, thanks to its market-leading Wellcome supermarkets. ?Supermarket chains are the biggest sales channel in Hong Kong, accounting for 78% of the modern grocery retail trade (HK$36.7bn of HK$46.8bn) in 2012,? says CIMB analyst, Yeo Zhi Bin, in a recent report published on Oct 9. Supermarkets are not just the biggest sales channel in Hong Kong but the fastest growing, with forecast annualised growth rates of 2% until 2017, when gross sales are expected to hit HK$40.5 billion ($6.5 billion).

In addition, the company also has a strong position in Hong Kong?s convenience store business through its 7-Eleven franchise. Collectively, the Wellcome and 7-Eleven chains have enabled Dairy Farm to capture a 28% market share of total grocery spending in the Special Administrative Region. The next biggest player, the AS Watsons group, lags well behind, with just 17% of the market there, according to market researcher, Euromonitor International.

Another bright spot has been Indonesia, despite the country accounting for only 11% of the company?s revenues in FY2012. ?Dairy Farm?s 64%-owned PT Hero is growing rapidly in Indonesia, driven by the accelerating income growth, rapid urbanisation and significant room for growth of the modern retail format,? says Yeo.

In Indonesia, the modern Western-style grocery retailers have posted an annualised 19.3% rise in sales in the years from 2007-12 to reach IDR 134.0 trillion ($14.7 billion) by the end of that period. ?This is the most dynamic sales (growth) among Dairy Farm?s main markets,? says Yeo. ?We expect the underlying strength to persist. Modern grocery retail spending is expected to grow by 7.9% (annualised) from 2012-17 to IDR 195.6 trillion.?

Despite that, Yeo believes there is every chance that the actual growth in retail spending at modern groceries could surprise on the upside. ?Modern trade only makes up 15% of the IDR 896.4 trillion total grocery spending (in 2012). There is enormous room for growth,? he explains. Driven by the rising middle class in Indonesia, all modern formats are expected to grow robustly in the next few years, with the highest growth coming from the convenience store and mini-mart formats. The only downside for Dairy Farm?s Indonesian operations in recent years and especially of late, has been the depreciating domestic currency. That has eaten into translated earnings after conversion to the company?s US dollar-base currency.

The company?s other geographical sources of earnings ? Malaysia and Singapore ? have been less promising, due to severe competition. ?Especially in Malaysia, Dairy Farm faces intensifying competitive pressure as the local players step up,? says Yeo.? As the top retailer in Malaysia and number 2 in Singapore, the group is fighting tooth and nail to defend its market share.? For example, Dairy Farm has had to trim product prices In Malaysia, reducing its profit margins as well as introducing the mini-mart format to reinforce its hypermarket sales channel.

In Singapore, which accounted for one-fifth of Dairy Farm?s revenues last year, its Giant hypermarkets and 7-Eleven convenience stores have encountered margin pressures from other players. The company is the second-largest player in the city-state with an estimated 24% market share, behind leader NTUC Fairprice, with a 30% market share. ?Over the years, we observed that NTUC Fairprice opened new formats to match those of Dairy Farm, which have capped the multinational company?s prices,? says Yeo. However, it is still well ahead of third-placed Sheng Shiong, which has a 9% share of the market.

Overall though, Yeo believes Diary Farm?s earnings are rebounding from a trough. One bright spot is its health and beauty franchises, which have posted strong growth. These are the Mannings? chains in Hong Kong and Macau and the Guardian brand in other regions. ?We expect health and beauty to power ahead, posting 2012-15 growth rates of 16.6% for sales and 16.0% for EBIT,? says Yeo.

Finally, the CIMB analyst adds that Diary Farm?s stock has fallen to attractive levels after the 1H2013 disappointment and recent volatility in the stock market. ?It is trading at 24 times FY2014 P/E, which is just 9% above its five-year mean, the lowest in two years,? says Yeo. ?We see a window of opportunity to accumulate this blue chip stock, which offers investors: unique exposure to the pan-Asian consumer market leadership size and scalability, and a phenomenal ROE track record.? CIMB?s target price is US$11.90 ($14.80) for a potential upside of around 15% from its current price.