Pan-Asian retailer Dairy Farm International Holdings Ltd (SGX: D01) has had a tough 12 months. With a 6% increase in revenue in 2014 that was accompanied by a 2% uptick in profit, the company’s shares have sunk by 18% to US$8.48 since June 2014. Over the same time frame, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking Singapore’s market barometer the Straits Times Index (SGX: ^STI) – has gained 2.4%. Dairy Farm’s sharp fall amid a flat market raises the question: Can it be a bargain now? It’s a tough question to answer, but some clues could…
Pan-Asian retailer Dairy Farm International Holdings Ltd (SGX: D01) has had a tough 12 months. With a 6% increase in revenue in 2014 that was accompanied by a 2% uptick in profit, the company’s shares have sunk by 18% to US$8.48 since June 2014.
Dairy Farm’s sharp fall amid a flat market raises the question: Can it be a bargain now? It’s a tough question to answer, but some clues could perhaps be found from a checklist that super investor Peter Lynch had shared in his best-selling investing classic One Up on Wall Street.
Lynch gained fame due to his phenomenal track record while managing the Fidelity Magellan fund in the U.S. In his 13 year tenure at the helm of Fidelity from 1977 to 1990, he delivered a compounded annual return of 29%; for some context, at that rate of return, every $1,000 invested in the fund in 1977 would have become more than $27,000 by 1990.
With that, let’s see what the checklist can tell us about Dairy Farm.
1) The Price-Earnings (PE) Ratio: Is it low or high for this particular company and for similar companies in the same industry?
As a brief introduction, Dairy Farm runs hypermarkets, supermarkets, convenience stores, pharmacies, home furnishing stores, and food & beverage retail outlets. The company had 6,101 outlets in 11 countries and territories in Asia (including Hong Kong, Singapore, and Malaysia) as at end-2014.
Given that the main bulk of Dairy Farm’s business lies in its hypermarkets, supermarkets, and convenience stores, its closest peer in Singapore’s stock market would be Sheng Siong Group Ltd (SGX: OV8), which runs its eponymous supermarkets in Singapore.
Here’s how Dairy Farm’s valuation stacks up against both Sheng Siong and the market average:
Source: S&P Capital IQ
With these figures, we can see how Dairy Farm’s priced roughly in-line with its industry peer but at a premium to the market.
2) What is the percentage of institutional ownership? The lower the better.
Lynch had added this criterion because companies that flew under the radar of institutional investors (professional money managers) tended to offer better bargains.
In the case of Dairy Farm, there’s hardly any room for institutional investors to establish a meaningful ownership stake – as at 11 March 2015, the conglomerate Jardine Strategic Holdings Limited (SGX: J37) owns 77.6% of Dairy Farm.
3) Are insiders buying and whether the company itself is buying back its own shares?
Insiders are often more well-versed in a company’s operations than outside investors and if they or the company’s buying shares, it might signal a potential investing opportunity.
Unfortunately, there hasn’t been any sustained bouts of buying over the past six months from both insiders and Dairy Farm.
4) What is the record of earnings growth and whether the earnings are sporadic or consistent?
This is where Dairy Farm manages to shine.
Source: S&P Capital IQ
Over the past decade, Dairy Farm has been consistently profitable. In addition, it’s also managed to grow its earnings in a steady manner with only two down years in the timeframe under study (2004 to 2014).
5) Does the company have a strong balance sheet?
Here’s another area in which Dairy Farm excels. As of 31 December 2014, the retailer had US$662 million in cash on its balance sheet and total borrowings of only US$187.2 million – that’s a great balance sheet.
6) Does the company have room to grow?
This is perhaps one of the more important criterion in Lynch’s checklist and that’s because a company without the ability to grow cannot compound value for its shareholders over time.
With that, there does appear to be significant scope for growth for Dairy Farm. To that point, here’s what my colleague Chin Hui Leong had previously shared:
“Singapore and Hong Kong currently houses more than half of the 5,889 [at end-2013] retail outlets for Dairy Farm. At the same time, China alone has at least nine cities which are larger than Hong Kong in terms of population size. In 2013, Dairy Farm had only 972 retail outlets in China, so there is space for the company to grow further in the country.
Furthermore, according to Euromonitor International, China and Indonesia are each expected to generate more than a trillion U.S. dollars in additional sales through convenience stores in 2014. Dairy Farm has a strong convenience store presence in both countries.
Another report from the Economist suggests that rapid urbanisation and a growing middle class is expected to drive sales for the overall retail environment in Asia. The research outfit estimates that Asia will be the home to 1.7 billion middle class citizens by the year 2020.”
Apart from what Hui Leong had discussed, Dairy Farm had also completed its acquisition of a 19.99% stake in China-based supermarket operator Yonghui Superstores Co. for US$909 million in April this year.
The acquisition, which was first announced last August, gives Dairy Farm even more exposure to China’s retail market and also helps pave the road for any future expansion in the country. According to Dairy Farm’s management, the firm currently only has a 1% share of China’s US$800 billion modern grocery retail market (this includes the company’s stake in Yonghui).
A Fool’s take
There are things to like about Dairy Farm – most notably its consistent profit growth, rock-solid balance sheet, and apparent room for growth – but there are also issues to take note of with the most glaring one being its valuation.
With a PE ratio nearly twice that of the market’s, expectations are high for Dairy Farm and any disappointment in the execution of its business can easily result in painful declines in its share price. Investors would have to weigh the pros and cons with the firm in order to make an intelligent investing decision.
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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.