Dairy Farm International Holdings Ltd’s Latest Earnings: Short-Term Headwinds Seen

Dairy Farm International Holdings Ltd (SGX: D01) reported its full-year earnings yesterday evening. The reporting period was for 1 January 2015 to 31 December 2015.

As a brief background for context later, the pan-Asian retailer currently has a stake in over 6,500 retail outlets of different varieties around Asia. Dairy Farm has four main business segments: Food, Health and Beauty, Home Furnishings, and Restaurants. Retail store brands such as Maxim, Mannings, Guardian, Cold Storage, Giant Hypermarket, IKEA, and more fall under the company’s vast umbrella.

You can read more about Dairy Farm in here and here or catch up with its previous earnings report here.

Financial highlights

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

  1. For 2015, revenue for the retailer rose by 1% year-on-year to US$11.1 billion. On a constant currency basis, it would have been up 5%.
  2. Dairy Farm’s share of results of associates and joint ventures rose 23% to US$85 million for the reporting period.
  3. But, underlying net profit (which excludes certain non-trading items) fell 14% from US$500 million in 2014 to US$482 million. Profit attributable to shareholders was down 17% from US$509 million in 2014 to US$424 million.
  4. Consequently, underlying earnings per share (EPS) declined by 14% from 36.98 US cents in 2014 to 31.66 US cents in 2015 while the basic EPS followed up with a 17% drop to 31.39 US cents.
  5. For the full year, Dairy Farm’s cash flow from operations came in at US$700 million with capital expenditures clocking in at US$262 million. This gave Dairy Farm free cash flow of US$396 million, up from US$331 million a year ago (US$675.9 million in cash flow from operations and US$297 million in capex).
  6. As of 31 December 2015, the firm had US$256.7 million in cash and equivalents and US$740.2 million in borrowings. Dairy Farm’s balance sheet has deteriorated from a year ago when it had US$656 million in cash and equivalents and US$187 million in borrowings.

In all, Dairy Farm’s top-line inched up but saw bottom-line fall a good deal. The good news is the pan-Asian retailer still generates healthy free cash flow, which increased by 19%. This would be 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 groceries retailer Yonghui Superstores for US$912 million in April 2015. The positive effects to the addition of Yonghui Superstores can be seen in Dairy Farm’s 23% rise in share of results from associates and joint ventures.

Dairy Farm’s board of directors had proposed a final dividend of US$0.135 per share for 2015. Together with the interim dividend of US$0.065, Dairy Farm will be paying out US$0.20 per share in dividends for 2015, down from the 2014 dividend of US$0.23 per share.

Operational highlights and a future outlook

For the full year, the Food segment saw a 1% year on year growth in revenue to US$8.2 billion. The Food segment’s operating profit, though, had declined by 21% to end at $235 million for 2015. Disappointing results from supermarkets and hypermarkets in Singapore and Indonesia were cited as the cause.

Meanwhile, the Health and Beauty segment saw a 1.2% dip in revenue to US$2.37 billion for 2015. Operating profit fell from $218.8 million in 2014 to $185.5 million in 2015. Management commented that “a disappointing performance in Malaysia” was the main culprit here.

Home Furnishing was the outperformer of the lot with a 14% jump in sales to $568 million. Operating profit did even better, expanding by 25% to $63.6 million for the reporting year. The Home Furnishing segment had benefitted from the full year contribution of IKEA Indonesia. Elsewhere, Dairy Farm’s associate, Maxim recorded an increase of 8% in sales to end with US$1.9 billion for 2015.

All told, Dairy Farm ended 2015 with a network of 6,528 stores, up from 6,101 in 2014.

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

“The current economic headwinds in Asia will continue to make trading conditions difficult for the Group’s businesses in 2016. Despite this, the Group is continuing to invest in the development of its store network, supply chain infrastructure, IT systems and people to improve its competitive position. Dairy Farm’s market-leading businesses, healthy balance sheet, and exposure to Asia’s growth markets position it well for long-term success.”

The company is trying to get the right investments and business moves in place to drive long-term growth. Let’s see how that turns out.

Dairy Farm also reported that it had to divest 30% of its food retail business, GCH Malaysia, to comply with local regulatory requirements. The company is also looking to invest a further US$200 million in Yonghui Superstores, bringing its total investment in the fast-growing Chinese grocery chain to US$1.1 billion.

Foolish summary

Dairy Farm’s closing price yesterday was US$6.14. At that price, it is trading at a trailing price-to-earnings ratio (using the basic EPS) of 20 and has a trailing dividend yield of 3.3%.

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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.