He already has a significant stake in America’s Wal-Mart Stores (NYSE: WMT). But what would Buffett make of one of Asia’s biggest retailers, Dairy Farm (SGX: D01)?
If Net Income Margin is a sign of strength, then Dairy Farm could be seen as being a couple of steps ahead of Wal-Mart. Its most recent results reveal a Net Income Margin of 4.8%, which means that the owner of Cold Storage in Singapore and Wellcome in Hong Kong, made $4.80 of bottom-line profit on every $100 of sales. By comparison, Wal-Mart’s margin is 3.6%.
Not only is the bottom-line growing but top-line sales are expanding too. Since 2008, revenue has increased from S$9.6b to $13.1b. That equates to a compound growth rate of 6% a year.
Buffett likes efficiency and so too does Dairy Farm. Its Asset Turnover of 2.6 is over five times higher than Singapore’s blue chips. The average for the 30 companies that make up the Straits Times Index (SGX: ^STI) is 0.5.
Dairy Farm’s efficient use of assets, its respectable Net Income Margin and its use of leverage has helped drive its Return on Equity to almost 37%. It means that the retailer, which also owns Guardian and Mannings chemists, generated $37 of profit for every $100 of shareholder equity.
The Leverage Ratio, which stands at 2.8, could raise an eyebrow or two, given that Buffett is mindful of macroeconomic risk. After all, the greater the exposure to debt, the greater the exposure to interest-rate risk.
That said Dairy Farm’s interest payments are adequately covered by earnings. The lack of macroeconomic risk might explain the absence of share price volatility. Dairy Farm’s volatility of 19% is not too dissimilar to the market’s volatility of 18%.
Currently, Dairy Farm is valued at S$15.6b. Its book value is S$1.1b. That would suggest the company is valued at around 14 times book value, which is quite high. But then, Dairy Farm is a quality company, which is also majority-owned by Jardine Strategic Holdings (SGX: J37).
So, even if Buffett would like to buy the company, which I think he might, he would have a tough job persuading its current owners to part with the shares.
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