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Can Dairy Farm International Holdings Be The Next Big Winner?

Over the past 10 years since the start of 2004, the retailer Dairy Farm International Holdings (SGX: D01) has gained some 502% to US$10.29. By way of comparison, the Straits Times Index (SGX: ^STI) has achieved a return of just 86% to 3,286 points in the same time frame.

With such a strong history of market-beating performance, it’s perhaps natural to ask: Can Dairy Farm continue to beat the market from here onwards?

That can be a tough question to answer. Fortunately, we can glean some insights from investors who’ve been there and done that. One such person would be the legendary Peter Lynch. He managed the Fidelity Magellan Fund from 1977 to 1990 and achieved compounded annualised returns of 29%.

Lynch had penned down his investing wisdom and experience in the classic investing text, One Up On Wall Street, which contained a check-list that he himself had used whilst researching shares. Let’s see how Dairy Farm would fare against that.

1. The Price-Earnings Ratio: Is it low or high for this particular company and for similar companies in the same industry? (Generally, low PEs are preferred)

At Dairy Farm’s current share price, the company’s being valued at 28 times trailing earnings. That’s a valuation twice as high as the Straits Times Index’s PE ratio of 14.

Dairy Farm’s a retailer, but it’s not just any retailer. Across that industry space, the company actually operates supermarkets, hypermarkets, convenience stores, health and beauty stores, and home furnishing stores. Shoppers in Singapore might be familiar with Dairy Farm’s outlets under the 7-Eleven, Cold Storage, and Giant brands.

Though it has a wide range of retailing activities, the most important parts of Dairy Farm’s business would be its super and hypermarkets. Together, they accounted for 58% of the company’s total revenue for 2013.

In light of that, fellow supermarket operator Sheng Siong Group (SGX: OV8) would be one of the closest peers to Dairy Farm Holdings in Singapore’s share market. At its current price of S$0.65, Sheng Siong’s valued at 22 times trailing earnings.

From the valuation figures, it’s easy to tell how Dairy Farm carries a PE ratio that’s significantly higher than the market and its industry peer.

2. What is the percentage of institutional ownership? The lower the better

This criterion was used by Lynch to gauge the level of institutional interest in any particular share. For Lynch, shares that flew under the radar of institutional investors would tend to offer better bargains as they’re less well-known in the market.

As of 31 May 2014, the conglomerate Jardine Strategic Holdings (SGX: J37) actually owns 78% of Dairy Farm. That level of majority-ownership by Jardine Strategic would leave very little room for institutional investors to take up meaningful stakes in Dairy Farm. In fact, institutional investors only own around 9.9% of Dairy Farm according to S&P Capital IQ.

3. Are insiders buying and whether the company itself is buying back its own shares?

Lynch liked looking at insider buying activity because such actions might be a signal for an undervalued share. In addition, if insiders are also big shareholders of a company, it would help outside shareholders align their interests with the insiders.

In Dairy Farm’s case, there has been no buy back activity from both the company and its insiders over the past six months.

4. What is the record of earnings growth and whether the earnings are sporadic or consistent?

Between 2003 and 2013, Dairy Farm has been consistently profitable in addition to having its earnings show a clear upward trend.

Year

Earnings per share (US$) Year-on-year % change

2003

0.094

2004

0.189 102%

2005

0.153 -19%

2006

0.157 2%

2007

0.192 22%
2008 0.247

29%

2009 0.270

9%

2010 0.305

13%

2011 0.359

18%

2012 0.331

-1%

2013 0.371

12%

Source: S&P Capital IQ

5. Does the company have a strong balance sheet?

Based on Dairy Farm’s latest financials, its balance sheet is in great condition with US$728 million in cash and equivalents while having only US$82.3 million in total debt.

6. Does the company have room to grow?

In Dairy Farm’s latest 2013 annual report, Chairman Ben Keswick gave a great snapshot of what the company’s working on to fuel its growth: “Several strategic initiatives have been taken in the past year to reinforce the foundations for growth. [Dairy Farm] has been reorganised by format into four divisions consisting of Food (including Convenience Stores), Health and Beauty, Home Furnishings and Restaurants. Significant investment is being made in people, infrastructure and systems to position Dairy Farm for sustained growth across Asia.”

There are also other positive signs that point toward room for growth in Dairy Farm’s retail activities. For instance, in the 2013 annual report, Keswick also mentioned how the company had “delivered healthy like-for-like sales growth in its major businesses.” Like-for-like sales, or same store sales, compares revenues for stores that been opened for at least one year and helps measure the level of demand from consumers for a retailer’s existing stores.

Given that like-for-like sales is growing at Dairy Farm, that’s a sign that consumer demand for the company’s retail activities have not diminished. In fact, in Dairy Farm’s interim management statement for the period 1 January 2014 to 6 May 2014, the company also reported that “like-for-like sales growth was achieved in most markets.”

With Dairy Farm making the right strategic moves to improve operational efficiency while seeing growing demand in its retail stores at the same time, it does seem that there’s room to grow for the company.

Foolish Bottom Line

In a final tally, Dairy Farm scores well on a few fronts: 1) It has a low level of institutional ownership; 2) it has been growing its profits consistently; 3) it has a clean balance sheet; and 4) it has ample space to grow.

But, does having a 4/6 score mean that Dairy Farm can be a market-beating share from here onwards? Unfortunately, no clear answer can be given yet. That’s because more work has to be done to understand the company better. For instance, what’s Dairy Farm’s cash flow situation like? What is its competitive advantage over other supermarket or hypermarket retailers? How is it going to handle the threat of e-commerce?

Those questions – and more – have to be answered before anyone can have a more definite gauge of Dairy Farm’s ability to beat the market going forward.

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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.