Dairy Farm is near a 52 week high; Is there more room to run?

Singapore’s stock market, as represented by the Straits Times Index (SGX: ^STI), has delivered a fairly acceptable return over the last 12 months – it is up by 1.5%.

However, there is one company that has delivered a better performance in the same period. Its name is Dairy Farm International Holdings Ltd (SGX: D01). At its closing price of US$7.43 yesterday, Dairy Farm’s shares are up by around 15% from where they were on 6 September 2015.

What could have contributed to the rise in Dairy Farm’s share price over the past year? Before we take a look at the possible reasons, let’s first have a quick background on the company.

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 and IKEA all fall under its vast umbrella.

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

Turnaround in Sight

Despite its share price reaching a 52 week high, Dairy Farm’s stock had actually fallen by almost 50% from the period between March 2015 and March 2016. This is probably due to investor concerns that it has suffered from a decline in operating income in year 2015 and saw operating margin fall to an all-time low of 3.9%.

However, things are starting to look up this year. In its first-half results, the pan-Asian retailer managed to post a 3% increase in underlying net profits to US$199 million, underpinned by a 47% jump of revenue derived from its associates and joint ventures. The latter largely comes from its investment in Yong Hui supermarkets back in April 2015.

Meanwhile, the company has also come up with several measures to drive growth:

  1. Increase in fresh produce within Dairy Farm’s stores
  2. Building distribution centres to support the Fresh initiative (stated above)
  3. Push for eCommerce across the region

You can also read more about them here.

  1. Stable historical dividend payouts

Dairy Farm’s dividends has either grown or remained steady over the past decade as you can see below:

Dairy farm dvd
Source: Dairy Farm’s website

On top of that, the payout ratio has remained around 60-70% in the past 5 years, which means that the company can continue to pay dividends not at the expense of profits. Having a stable dividend-paying track record has probably lent a helping hand to the rise in Dairy Farm’s share price over the past year.

Based on its total dividend of US$0.20 per share in FY2015, the company has a trailing yield of 2.7% at its closing share price yesterday. For perspective, this is close to the SPDR STI ETF’s (SGX: ES3) yield of 3.15%. The SPDR STI ETF is an exchange-traded fund that tracks the fundamentals of Singapore’s market barometer, the Straits Times Index(SGX: ^STI).

Foolish Takeaway

Investors are often troubled by the fact that shares which are near record highs may drop or pull back after any the euphoria subsides. But, it’s good to note that there’s no point in relying on a share’s 52-week high or low to make investing decisions. It’s far more important to dig deep into the share’s business fundamentals and think about its future five, 10, or even 20 years from now.

At Dairy Farm’s closing share price of US$7.43 yesterday, it has a trailing price-to-earnings (P/E) ratio of 23.4. For perspective, the SPDR STI ETF has a P/E of 12.2 at the moment.

For more investing insights and to keep up to date on the latest financial and stock market news, you can sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned. Dairy Farm International has been recommended by Stock Advisor Gold.