Action: Upgrade to Buy; TP up to HKD6.2 on better execution
Following recent visits to the company’s stores, extensive market surveys and management updates, we believe Daphne has put a rather tough 2013 behind it. We look for a near-doubling of earnings in 2014F as a result of a drive to close non-performing stores, improve product mix, focus on staff retention and improve IT/logistics. We believe same-s tore sales growth (SSSG) bottomed in 3Q13 and expect gradual improvement from 4Q13F (to be reported later this month) and through 2014F. Combined with efficiency and margin gains, we look for the OPM to rebound from 4.1% in 2013 to 8.0% in 2014F.
Catalysts: Quarterly SSSG update (4Q13 in mid-Jan, 1Q14 in Apr and 2Q14 in Jul) and management’s new strategic plan update in March
Our consumer survey indicates that Daphne’s brand recognition and product differentiation remain strong; this is why we think the company can execute a 5% ASP increase in 2014F after an estima ted 3% decline in 2013. We believe the company’s weak performance last year was primarily due to extremely high store-staff turnover. Our survey leads us to believe that staff turnover has stabilised as Daphne recently increased salaries and commissions, but the improvement in SSSG and ASP should more than cover the additional cost.
Valuation at historical trough as consensus has yet to spot the story
Daphne is trading at 9.3x FY14F P/E (diluted EPS of HKD0.36) and 0.6x FY14F P/S, which takes it back to the trough five years ago. As we believe a turnaround is around the corner, we assign a target P/E multiple of 17x (on a par with the global average), which we think is justified given much higher growth than peers. At HKD6.2, we look for 85% potential upside and upgrade our rating to Buy.