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1 Cheap Stock You Can Afford Now: Dairy Farm International Holdings Ltd

Retail outfit Dairy Farm International Holdings Ltd (SGX: D01) is today an affordable share – and to top that off, it may be cheap too.

A case for affordability

I use ‘affordable’ in the sense of how much capital an investor has to fork out to purchase one lot of Dairy Farm’s shares.

Prior to 19 January this year, Singapore’s stock market had a board lot size of 1,000 shares, meaning to say that the minimum capital outlay for one lot of Dairy Farm’s shares at today’s prices (US$9.23) would be a hefty US$9,230 at least.

But with stock exchange operator Singapore Exchange reducing the board lot size from 1,000 shares to 100 on 19 January, investors would be able to purchase one lot of the retailer’s shares with just US$946 (before transaction-related fees are included).

Making sense of cheapness

With that, let’s move on to what’s really important here – Dairy Farm’s cheapness.

Dairy Farm’s a pan-Asian retailer with over 6,100 outlets scattered across different countries. Retail formats under the company’s umbrella include supermarkets and hypermarkets (think Giant and Cold Storage amongst others); convenience stores (7-Eleven and others); health and beauty products outlets like Guardian; and even restaurants and furniture mega-stores like IKEA.

The firm’s supermarkets and hypermarkets business is by far its largest, making up 57% of total sales in 2014.

Dairy Farm's price-to-earnings (PE) ratio from January 2005 to 25 March 2015

Source: S&P Capital IQ

At its current price, Dairy Farm has a trailing price-to-earnings (PE) ratio of 24.5. As you can see in the chart above, that’s just about in-line with the retailer’s own historical average PE of 25.4 from the start of 2005 to today.

Shopping to grow

Besides having a current valuation that’s in-line with its own historical norms, Dairy Farm has also had a history of solid business growth. Over the same time period detailed in the chart above, the retailer has seen its earnings per share triple from US$0.126 to US$0.377.

The firm has also either increased or maintained its ordinary dividends in each calendar year since at least 2004. You can see this in the table below:

Year

Ordinary dividends per share (US cents)
2004 7.4
2005 8.5
2006 9.4
2007 11.5
2008 14.0
2009 16.0
2010 18.0
2011 21.0
2012 23.0
2013 23.0
2014

23.0

Source: S&P Capital IQ

A Fool’s take

It’s worth noting that despite Dairy Farm’s non-demanding valuation and strong historical track-record of growing its business, it may not necessarily be a good investment.

That’s because it’s the firm’s future business performance that matters.

On that note, it may be encouraging to learn that Dairy Farm still sees a long runway for growth ahead. As my colleague Chin Hui Leong noted, the company’s share of China’s $800 billion modern grocery retail market is only 1%. (For some perspective, Dairy Farm clocked sales of US$11 billion in 2014.)

That being said, Dairy Farm’s growth in recent years has slowed (for instance, revenue growth for the firm in 2014 was just 6.3%; in 2011, it was 14.6%), and it’s far from certain that the firm has the ability to make full use of its huge market opportunity.

All told, investors would have to weigh the risks and rewards with the firm in order to come up with an intelligent investing decision.

But whatever the conclusion may be, there’s no mistake in saying that Dairy Farm is now a much more affordable share given the lot-size reduction.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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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 company mentioned.