Looking at Dairy Farm International Holdings through the Eyes of an Investing Master

Dairy Farm International Holdings (SGX: D01) is a leading pan-Asian retailer with over 5,800 outlets worldwide. The firm operates supermarkets, hypermarkets, convenience stores, home furnishing stores, and health and beauty stores under famous brands such as Giant, Cold Storage, Jasons MarketPlace, 7-Eleven and Guardian. As of 30 June 2014, Dairy Farm is 77.6% owned by Jardine Strategic Holdings (SGX: J37).

For the past five years, shares at Dairy Farm had grown at a healthy clip of 13% per annum from $5.80 to its current price of S$10.70. Can it continue to do well in the future? To answer that, we could use a checklist that originated from the famous investor Peter Lynch.

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)

Dairy Farm is currently valued at 29 times its historical earnings. The only other locally-listed peer, Sheng Siong (SGX: OV8), carries a historical PE ratio of 23. Meanwhile, the general market, as represented by the Straits Times Index (SGX: ^STI) at its current level of 3,283 points, has a trailing PE ratio of 14.

From these figures, it can be seen that Dairy Farm is valued at a premium as compared to Sheng Siong and Singapore’s share market benchmark.

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

Franklin Resources Inc., which is part of Franklin Templeton Investments, a global investment firm, owns 6.6% of Dairy Farm. It is the only other substantial shareholder of the supermarket giant, apart from Jardine Strategic.

3) Are insiders buying and whether the company itself is buying back its own shares? Both are positive signs

This March, options were granted to some insiders of the company. But other than that, there hasn’t been buying from either insiders or the company itself.

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

From 2008 to 2013, Dairy Farm’s earnings had grown from US$333.0 million to US$500.9 million. This translates to a compounded annual growth rate of 8.5%. In addition, the company’s track record of profit growth has also been pretty consistent in those five years apart from a 7% dip in 2012

Year Net Profit (US$, million)
2008 333.0
2009 362.2
2010 408.0
2011 480.5
2012 446.5
2013 500.9

Source: Dairy Farm annual report

5) Does the company have a strong balance sheet?

As of 31 December 2013, the firm had total borrowings of US$90.8 million and a cash balance of US$728.4 million – it is basically swimming in cash.

6) Does the company have room to grow?

It may seem that Dairy Farm’s markets are saturated in larger Asian markets like Hong Kong and Singapore. However, emerging countries such as Vietnam and Cambodia may generate growth for the firm. As of December 2013, Dairy Farm had a total of 2,249 stores in Hong Kong, 815 in Singapore and only 22 and 27 in Vietnam and Cambodia respectively.

In the press release for Dairy Farm’s 2013 results, the company said that it remains confident about its long-term outlook and is continuing to invest for growth. It is focused on enhancing the appeal of its brands and improving its operations to drive sales and profit growth. The company also added that it will continue to drive organic growth across its different formats in existing markets in addition to pursuing acquisition opportunities selectively where they can enhance our unique portfolio of brands and businesses”.

Foolish Bottom Line

Dairy Farm seems to be doing well on all fronts, except the first criterion on valuation. At a PE ratio of 29, the implication is that investors have to wait close to three decades for Dairy Farm to earn enough profit to cover the initial investment if the company’s earnings remain at the same level from now till kingdom come. However, if investors feel that the firm will have phenomenal growth, especially in the emerging markets, to substantiate a PE of 29, they can always look into this supermarket giant to ride on its coattails.

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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.