Dairy Farm International Holdings Ltd (SGX: D01) is a leading pan-Asian retailer that owns a chain of retail stores in different formats and under different brands — hypermarkets (Giant), supermarkets (Cold Storage), health and beauty stores (Guardian), and convenience stores (7-Eleven). The group operates in Singapore, Malaysia, Indonesia, Hong Kong, and China.
DFI reported a downbeat set of earnings in fiscal year 2018 (FY 2018), with net profit attributable to shareholders taking a hit due to a restructuring charge of US$453 million for the Food business in Southeast Asia. The group also announced the initiation of a 5-year transformation plan that sets out strategic goals in order to re-align the group with current trends. In addition, DFI’s share price recently hit a 52-week low at US$7.11, even as the Straits Times Index clocks up a year-to-date gain of 10%.
So, should investors be concerned as to whether the group will be able to maintain its dividend?
DFI’s dividend history
Firstly, I took a look at DFI’s 5-year dividends trend. Investors should note that dividends were reduced from 23 US cents to 20 US cents from 2014 to 2015, as a result of weaker operating and net profit in 2015. Though total dividend did increase slightly to 21 US cents in 2016, subsequent years saw dividends stagnate at 21 US cents, never reaching the high in 2014.
Consistent free-cash-flow generation
Next, I looked at DFI’s free-cash-flow trends for the last five years. From the table above, it’s clear that DFI has a history of very healthy and consistent free-cash-flow generation. Investors should note that the impairment recorded for FY 2018 was an accounting adjustment, and this had no impact on operating cash flow.
As a reference, a total of US$284 million of cash was paid out for FY 2018 as dividends (i.e., 21 US cents), and this was below the level of free cash flow for all five years. Based on this aspect alone, DFI can be said to be conservative.
The transformation plan may require more resources
The recently announced transformation plan involves the closure of hypermarket stores in Singapore, and also the re-jiggering of the food business in Southeast Asia. Though DFI has declared that the initial net cash cost of this plan will be less than US$50 million, it is envisaged that more costs and expenses may crop up in future years. Part of the transformation plan also involves a strategy to penetrate further into China, which could further drain cash and resources.
These initiatives may increase the overall capital expenditure for the group, and the revamp of the food division may also result in an increase in fixed operating expenses. The continued challenges DFI faces are unlikely to abate anytime soon, and they could cause operating cash flow to decline. All of the factors above point to a potential reduction in free cash flow below the 5-year average.
DFI may reduce dividends
DFI has demonstrated its willingness to reduce dividends in FY 2015 when it encountered challenges in its business, and this may occur again in the future should conditions not improve for the group. DFI’s transformation plan may also consume significant resources and cash, thus necessitating a reduction in dividends. From the evidence presented above, it looks like there is a likelihood of dividends being reduced, and investors, therefore, should remain watchful and monitor the group’s financial performance.
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 Holdings Ltd. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.