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Dairy Farm International Holdings Ltd’s Latest Earnings: What’s Next After an 18% Fall in Profits?

Dairy Farm International Holdings Ltd (SGX: D01) reported its earnings for the first-half of its fiscal year ending 31 December 2015 yesterday evening. The reporting period was for 1 January 2015 to 30 June 2015.

The pan-Asian retailer, which runs supermarkets, hypermarkets, convenience stores, restaurants, and more, boasts more than 6,400 outlets around Asia. Dairy Farm has four main business segments: Food, Health and Beauty, Home Furnishings, and Restaurants. The firm has stakes in outlets such as Maxim, Mannings, Guardian, Cold Storage, Giant Hypermarket, and IKEA.

You can read more about Dairy Farm in here and here.

Financial highlights

The following’s a quick take of Dairy Farm’s latest financial figures:

  1. Revenue for the first six months of 2015 rose 5.5% year-on-year to US$5.6 billion.
  2. However, net profit fell 18% from US$234 million in the first half of 2014 to US$192 million.
  3. Consequently, earnings per share (EPS) also declined by 18% from 17.28 US cents in the first half of 2014 to 14.16 US cents in the first half of 2015.
  4. Dairy Farm’s share of results of associates and joint ventures rose 46.8% to US$31.7 million for the reporting period.
  5. In the first half of 2015, Dairy Farm’s cash flow from operations came in at US$314.7 million with capital expenditures clocking in at US$133 million. This gave Dairy Farm a healthy free cash flow of US$181.7 million, up from US$150.8 million seen a year ago (US$313.3 million in cash flow from operations and US$162.5 million in capital expenditures).
  6. As of 30 June 2015, the firm had US$362.2 million in cash and equivalents and US$958.1 million in borrowings. Dairy Farm’s balance sheet has deteriorated significantly from a year ago when it had US$656.1 million in cash and equivalents but just US$88 million in borrowings.

In all, Dairy Farm’s top-line had moved up but its bottom-line fell. The good news is the pan-Asian retailer still generates healthy free cash flow. This is important, as Dairy Farm took on a chunk of debt (as reflected by the weakened balance sheet) to purchase a 19.99% stake in the Shanghai-listed and China-based groceries retailer Yonghui Superstores for US$909 million in April.

The positive effects to the addition of Yonghui Superstores can be seen in Dairy Farm’s 46.8% rise in share of results from associates and joint ventures.

Dairy Farm’s board of directors had proposed an interim dividend of US$0.065 per share for the first half of 2015, which was unchanged from the same period last year.

Operational highlights and a future outlook

Overall top-line growth for Dairy Farm in the first half of 2015 was driven by a 19.8% year-on-year increase in the Home Furnishings segment and a 5.7% year-on-year increase from the Food segment (where the supermarkets, hypermarkets, and convenience stores operations are housed under).

Moving to the bottom line, the Food segment saw a sharp 25% dip in operating profits compared to a year ago. Dairy Farm had struggled with squeezed margins in Hong Kong, Singapore, and Indonesia.

Similarly, the Health and Beauty segment (where stores like Mannings and Guardian sit) also experienced an 8% decline in operating profits as well. Profitability in Malaysia was impacted by the new government service tax in April while Indonesia saw its results being pressured by wage and rent increases.

The Home Furnishings segment is the only segment that held the fort with a 31.9% year-on-year rise in operating profit. Its new IKEA store in Indonesia, together with good performance in Hong Kong and Taiwan, had contributed to the better operating profit.

Ben Keswick, Dairy Farm’s Chairman, shared his comments about the company’s outlook in the earnings release:

“While sales have been broadly positive across most businesses, margin pressures continue to impact the financial performance of the Food business. The Group’s results were impacted further by adverse exchange rate movements. We are pleased to have completed the investments in Yonghui and in San Miu. We are focusing on delivering a clear value proposition to our customers as part of our modern retail offering, and we remain well positioned to take advantage of our regional footprint, our competitive position in key markets and our strong financial position.”

Foolish summary

As of Dairy Farm’s closing price of US$8.49 yesterday, it’s trading at a trailing price-to-earnings ratio of 24, and has a trailing dividend yield of around 2.7%.

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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 owns shares in Dairy Farm International Holdings.