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Why I Think This Singapore Retailer Could be an Amazing Turnaround Story

Dairy Farm International Holdings Ltd (SGX: D01), or DFI, is a pan-Asian retailer that operates many retail formats such as hypermarkets, supermarkets, convenience stores, and health and beauty stores. As of 2018 year-end, the group and its associates and joint ventures operated 9,700 outlets and employed over 230,000 people.

Its business has faced issues recently and the company’s response was to carry out a transformation plan. I had written about the key details of this plan some time back. DFI is poised to enjoy significant benefits from it should all go well. Here’s one particular part of the plan that I’m excited about and which I feel could result in higher margins and possibly lead to higher dividends in future.

Massive growth potential in China

With the focus being on China, the potential to scale and grow cannot be underestimated as China is the world’s largest consumer market. Early on, DFI had recognised the importance of China as a growth market and had made an investment into Yonghui Superstores for a 19.99% stake. Yonghui acted as DFI’s initial gateway into the Chinese market, and the group plans to further embed themselves in China as it sees potential in serving the consumer market there.

In addition, DFI is also working with China technology companies to devise ways to grow its market share and presence. By tapping technology to enhance its offerings and to track consumer spending, basket size and other aspects, DFI will be able to curate their offerings better, thus attracting higher footfall and increasing consumer spending.

The use of technology will also improve margins over time. Higher levels of automation will cut down on unnecessary manpower as operations become more efficient, while less staff are also needed to track operational metrics if there are computerised sensors that are able to do the same job more effectively.

Better cash flow and dividend prospects

With management’s savvy in running the business and their penchant for prudence, I am confident that the business should be able to turnaround once these initiatives are implemented, though patience is needed in order for the benefits to flow through to the bottom line.

This transformation plan has also demonstrated that management is now more focused on growing in areas where it has strengths and that it is also more proactive in responding to changes in the retail environment. The improvement in margins should result in better cash flows, which should then lead to an increase in dividends. Once the turnaround plan gains traction, DFI’s share price should also re-rate positively and offer investors great capital gains as well as dividend potential.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Dairy Farm International Holdings Ltd. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.