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Where Is Dairy Farm International Holdings Ltd Heading To Next?

Two weeks ago, I covered the business segments of pan-Asian retailer Dairy Farm International Holdings Ltd  (SGX:D01). This week, I would like to take a deeper look at the geographical revenue contribution of the company.

As a recap: Dairy Farm has been a steady winner over the past five years. From 1 January 2009 to its closing price yesterday, it has made capital gains of around 129%. By comparison, the total returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was around 77% for the same duration.

For the past five plus years, the company has collectively paid out US$0.96 in dividends. The dividend has also steadily increased from US$0.15 in the financial year ended 2009 (FY2009) to US$0.23 in the financial year ended 2013 (FY2013).

Where to next, Dairy Farm?

From its annual report, we are able to plot out Dairy Farm’s sales distribution for different regions from 2009 (the financial year lines up with the calendar year) to 2013. The pan-Asian retailer’s revenue spread is segmented into three regions, North Asia, East Asia and South Asia.

diary farm graph 1

Source: Company Annual Report

According to the 2013 annual report, North Asia comprises Hong Kong, mainland China, Macau and Taiwan. East Asia comprises Malaysia, Indonesia, Vietnam and Brunei. South Asia comprises Singapore, Cambodia, the Philippines and India.

North Asia is the largest contributor of revenue of the trio. It makes up 57.7% of the Dairy Farm’s 2013 revenue. The North Asia region is also the fastest grower with a growth of almost 50% in the past five years. The East Asia, and South Asia regions respectively made up 27.7% and 19.23% of the 2013 revenue. Both regions also exhibited comparable growth of more than 40% in the past five years.

Beyond revenue, we would ideally like to see profit rise together with the revenue increases. For that, we look into the operating profit by country.

diary farm graph 2

Source: Company Annual Report

North Asia really shines in the operating profit contribution. For 2013, the region made up more than 79% of the operating profit for the company. On the flipside, operating profit for East Asia, in particular, has been suffering for the past two years.

Its operations in Malaysia could be the source of its profit challenges in East Asia. In this case, Dairy Farm had to restate its earnings for 2012 due to incorrectly recognized income in Malaysia worth US$59 million for the year. The drop in operating profit was also due to aggressive pricing from competitors in Malaysia against its Giant, and Cold Storage operations.

Elsewhere, the dip in operating profit for South Asia in 2013 could be due to sluggish consumer demand for its Giant and 7-Eleven operations in Singapore.

Foolish take away

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in the company’s share price is supported by the quality of growth that we are looking for.

There are some region specific challenges to deal with in particular with rising labor cost and to a lesser extent, foreign exchange fluctuations. Operations in Singapore has had its share of challenges with both its Supermarket/Hypermarket segment, and Health and Beauty segments affected. Its operations in Indonesia has also been affected by increase in minimum wages.

On the growth side, Dairy Farm added 60 new 7-Eleven stores in China, while adding five hypermarkets and 16 supermarkets in Indonesia in 2013. These two countries may be the focus of the company for future growth.

Strategically, the way Dairy Farm has decided to go forward is by shifting its focus from geographical regions to the retail formats. We will have to continue to monitor developments, and see if this shift in focus will bring the same historical results as the past five years.

Dairy Farm currently trades at a price-to-earnings ratio of 26.5 and has a dividend yield of approximately 2.3% based on last Friday’s close.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.