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Foolish Face-Off: Dairy Farm versus Tesco

In this instalment of the Foolish Face-Off, we will pit two supermarket giants, Diary Farm International (SGX: D01) and Tesco (LSE: TSCO) against each other. Diary Farm is listed in Singapore Exchange (SGX: S68) while Tesco is listed in the London Stock Exchange.

Introducing the Contenders

Dairy Farm is a leading pan-Asian retailer with over 5,700 outlets worldwide. The firm operates supermarkets, hypermarkets, convenience stores, health and beauty stores and home furnishings stores under famous brands such as Giant, Cold Storage, Jasons MarketPlace, 7-Eleven and Guardian, among others.

Tesco, on the other hand, is one of the world’s largest retailers with operations in 12 countries across Asia and Europe. It operates more than 6,700 outlets worldwide and is currently the grocery market leader in the United Kingdom with a market share of around 30%.

Dairy Farm Tesco
Market Cap US$12.3b £26.0b
Revenue US$9.8b £64.8b

Round 1: Profitability

In this round, we will analyse the profitability of the companies in terms of profit margins and Return on Equity (ROE). The ROE figure reveals how efficient the management is in turning every dollar or pound of shareholders’ capital into profits.

Dairy Farm Tesco
Gross Margin

28.9%

6.3%

Net Margin

4.6%

0.2%

Return on Equity (ROE)

37.7%

7.4%

For every dollar of revenue created by Dairy Farm, 4.3 cents is generated as profits while for Tesco, every pound of revenue only generates 0.2 pence in profits. Dairy Farm also has superior ROE as compared to Tesco.

Dairy Farm is the winner in this round.

Winner: Dairy Farm

Round 2: Growth

In the second round, we’ll be looking at some numbers concerning the growth of the two giants. Companies that can grow their sales and profits steadily over time should also see their intrinsic value in tandem in the long-term.

Dairy Farm Tesco
Revenue Growth CAGR

11.7%

4.7%

Earnings per Share (EPS) Growth CAGR

7.3%

-10.5%

Dividend Growth CAGR

12.9%

5.4%

Dairy Farm has grown its business at a compounded growth rate of 7.3% per annum while that of Tesco has decreased 10.5% per annum. Dairy Farm has also consistently increased its dividends at a higher rate than Tesco.

Once again, Dairy Farm emerges triumphant.

Winner: Dairy Farm

Round 3: Valuation

As Foolish investors, it is paramount that we focus on the value of the business and not on the daily squiggle of the stock price. Looking at the absolute price does not tell us anything about the value of the business. We will now look at the Price-to-Earnings (PE), Price-to-Sales (PS) and Dividend Yield of the companies.

Dairy Farm Tesco
Price-to-Earnings (PE)

28.3

21.1

Price-to-Sales (PS)

1.3

0.4

Dividend Yield

2.5%

4.6%

Share Price

US$9.09

£320.90

 

Shares of Dairy Farm have been accorded a much higher PE and PS than Tesco’s shares. The dividend yield of Dairy Farm is also lower than that of Tesco. Even though the absolute price of the UK grocery market leader is much higher than that of Dairy Farm, Tesco seems to be cheaper in terms of valuation.

With all three criteria in Tesco’s favour, Tesco is the clear winner in this round.

Winner: Tesco

Foolish Bottom Line

Final Score: 2-1 to Dairy Farm

Dairy Farm is the overall winner here today with better profitability and growth.

However, a solid conclusion cannot be made on which company is the better one as there are plenty of other important aspects that have not delved into. For example, we have not looked at the balance sheet strength and the respective cash flow situation of the two companies. We have also not looked into the management and their track record.

Furthermore, Dairy Farm operates only in Asia whereas Tesco is more of a worldwide operator, exposing itself to more risks.  Tesco may be trading at a higher earnings yield (inverse of PE) than Dairy Farm due to this reason.

This Foolish Face-Off serves as a direction in the right path and takes some heavy-lifting off your back. If you are keen to find out more about how other companies in the same industries stack up against each other, do stay-tuned for more of our Foolish Face-Offs.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.  Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.