Dairy Farm International (Dairy Farm) (SGX: D01) is a leading pan-Asian retailer that operates hypermarkets, supermarkets, convenience stores, health and beauty outlets, and home furnishing stores. The group is one of Asia’s premier retailers and operates many different formats under brands such as Giant, Cold Storage, 7-11, Guardian and IKEA. There are three aspects of its business that investors may find intriguing.
Pays a consistent dividend
Dairy Farm pays a consistent and regular dividend as a result of profits generated by its core activities. For FY 2018, the group declared a final dividend of 14.5 U.S. cents per share, bringing the total full-year dividend to US$0.21 cents/share. At Dairy Farm’s last done share price of US$7.90 as of 22 April 2019, this translates to a dividend yield of 2.6%.
Note that the group has a practice of paying dividends twice-yearly, with the final dividend usually being higher than the interim dividend. Investors who purchase shares in the company can enjoy twice-yearly dividends and also be part of a brand-name Asian retailer that has operations in many south-east Asian countries such as Singapore, Malaysia, and Indonesia, as well as in North Asia’s China and Hong Kong.
Food business undergoing restructuring
Dairy Farm’s hypermarket and supermarket divisions are facing tough challenges as the food industry continues to evolve. Management admitted being slow to respond to changes in consumer behaviour and trends, and they are now paying the price for it. Customers are a discerning bunch and now want access to products across a multitude of channels, and in different formats, ranges, and locations.
The group has decided to write down the goodwill and impair the assets associated with the Giant business, which forms the bulk of hypermarket and supermarket operations, to the tune of US$453 million. Although this is obviously a painful decision, management intends to bite the bullet to institute changes now rather than wait for things to get much worse.
Multiyear transformation plan in progress
In addition to the significant writedown, Dairy Farm has also conducted a strategic review (“Review,” below) and launched a multiyear transformation plan consisting of five strategic imperatives, which will bring about the necessary changes over the years to allow the business to build a strong platform for future growth.
Here’s a brief summary of each initiative:
1. Grow in China. China is one of the largest and fastest-growing consumer markets in the world, and Dairy Farm intends to further capitalise and tap into growth channels. The Review also identified opportunities to revise the group’s current approach and to achieve stronger growth in scale in the coming years.
2. Maintain strength in Hong Kong. The group already has a strong presence in Hong Kong, and the Review will allow management to reconsider their approach to opening new space, where it is opened, and to deliver greater range clarity for their Wellcome brand of stores.
3. Revitalise Southeast Asia. Changes are being planned and made to the Hypermarkets format in Southeast Asia due to under-investment over the years. Some changes made include putting more emphasis on Fresh Food, investing in value on Grocery and streamlining General Merchandise and Apparel to optimise range and space by category.
4. Build capability. Hiring the right people to boost the team at the group, with a view to transforming the business into a modern-day retailer. Thirty new senior management appointments were made during 2018, which will add further depth of experience to the management team.
5. Drive digital innovation. Two new positions were created: Chief Digital Officer and Chief Technology Officer. These positions are a tacit admission of the need for an IT upgrade in order to get the business up-to-speed in terms of digital change. The group admitted that it was mired in old infrastructure and that it is vital to upgrade this to stay relevant.
Fresh or stale?
Dairy Farm is a great company with a long track record of profitability and dividends. However, its recent earnings report shows areas of weakness and also highlighted many areas for improvement. It’s heartening to know that management is open to making tough decisions in order to turn the business around, and that they are also planning for long-term strategic growth.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Dairy Farm International. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.