Dairy Farm International Holdings Ltd’s Latest Earnings: Is There a Turnaround on the Cards?

Dairy Farm International Holdings Ltd (SGX: D01) reported its earnings yesterday evening. The reporting period was for the six month period from 1 January 2016 to 30 June 2016.

As a brief background, Dairy Farm is a retailer with a stake in around 6,500 outlets around Asia. It has four main business segments: Food, Health and Beauty, Home Furnishings, and Restaurants. Brands such as Mannings, Guardian, Cold Storage, Giant Hypermarket, and IKEA fall under its vast umbrella.

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

Financial highlights

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

  1. For the first-half of 2016, revenue for the retailer declined by 1% year-on-year to US$5.6 billion. On a constant currency basis, it would have been up 2%.
  2. Dairy Farm’s share of results of associates and joint ventures rose almost 47% to US$46.5 million for the reporting period.
  3. Underlying net profit was up 3% from US$192 million in the first-half of 2015 to US$199 million in first-half of 2016.
  4. Underlying earnings per share (EPS) was also up 3% from 14.25 US cents in the first-half of 2015 to 14.75 US cents for the first-half of 2016. On a constant currency basis, underlying EPS was up 5% year-on-year.
  5. In the reporting period, Dairy Farm’s cash flow from operations came in at US$181.3 million with capital expenditures clocking in at US$97.2 million. This gave Dairy Farm free cash flow of US$84.1 million, which is down sharply from US$181 million a year ago (US$314.7 million in cash flow from operations and US$133 million in capex).
  6. As of 30 June 2016, the firm had around US$232 million in cash and equivalents and US$862 million in borrowings. Dairy Farm’s balance sheet has deteriorated from a year ago when it had around US$362 million in cash and equivalents and US$958 million in borrowings

In all, Dairy Farm’s top-line fell. But the good news is the pan-Asian retailer was able to post a modest increase in underlying profit. This could be a welcome change for investors given that the company posted a 14% decline in underlying profit in 2015.

Yet, free cash flow was down sharply in the first-half of 2016. According to Dairy Farm, this was due to the timing of supplier payments. Operating cash flow might be something to keep an eye on for the next earnings report.

Debt is another focus area. Debt levels also increased at Dairy Farm. The retailer said that it signed up for new bank loan facilities totalling US$900 million in March this year. The loan helped to finance a further US$191 million position in China-based groceries retailer Yonghui Superstores. The additional investment allowed Dairy Farm to maintain a 19.99% stake in the Chinese company.

The positive effects of the addition of Yonghui Superstores (Dairy Farm completed its purchase of Yonghui Superstores’ shares in April 2015) can be seen in the 47% jump in Dairy Farm’s 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 2016, unchanged from a year ago.

Operational highlights and a future outlook

For first half of the year, the Food segment revenue saw a 1% year-on-year decline to US$4.1 billion although its operating profit managed to increase by almost 4% year-on-year to US$115.8 million. This is a turnaround from the 21% decline in operating profit recorded last year. Sales for the Food segment were down in Singapore and Indonesia, but profitability improved following the closure of underperforming stores.

Meanwhile Health and Beauty revenue was relatively flat at US$1.1 billion. Operating profit, though, fell by 11% to US$79.7 million in the first-half of 2016. All territories had lower profitability.

Home Furnishing posted 4% year-on-year increase in sales to US$282.2 million. Operating profit did even better, expanding by 20% to US$31.2 million for the reporting period.

Elsewhere, Dairy Farm’s associate, Maxim, recorded an increase of 6% in revenue to end with US$904 million for the first-half of 2016.

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

“While sales and profit performance in the first half have been encouraging in a challenging trading environment, the outlook remains uncertain with consumer confidence fragile in most markets. Our businesses are continuing to invest in their customer offerings and infrastructure, and are fully committed to enhancing their competitive positions.”

Dairy Farm’s closing share price yesterday was US$6.74. At that price, shares are trading at a trailing price-to-earnings ratio of around 21 and carry a trailing dividend yield of 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.