As investors, we should always be on the lookout for great bargains in the stock market. Of course, one also has to be discerning when we look at companies that have seen a sharp or sustained fall in their share price, as not every such instance yields a bargain. The difficulty lies in assessing if the share price plunge is justified, or if it may simply be temporary.
In the case of Dairy Farm International Holdings Limited (SGX: D01), or DFI, its share price has fallen by 22% year-to-date. As a recap, DFI is a pan-Asian retailer that has business divisions dealing with hypermarkets, supermarkets, convenience stores, health and beauty, food and beverage and furniture. The group has a strong presence in Asia with stores in Singapore, Hong Kong, China, Malaysia and Indonesia.
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In order to ascertain if DFI may be a great buying opportunity, I decided to take a look at the track record of this multi-format retailer.
Consistent free cash flow
From the above, it can be seen that DFI continues to generate consistent levels of free cash flow (FCF). With its recent H1 2019 earnings report, FCF for the half-year came in at US$534.6 million. This stellar track record is a testament to the quality of its business, despite DFI experiencing headwinds and competitive pressures in the countries in which it is present.
Transformation plan in progress
Investors should be reminded that DFI is currently in the midst of a multi-year transformation plan, as announced in their FY 2018 earnings report. As the first line of business, management has decided to shut down and repurpose the Giant hypermarket brand, and also make changes to its “Fresh” section so that it can compete better against competitors such as Sheng Siong Group Ltd (SGX: OV8).
The process of converting these stores to a different format will take time, effort and resources. Sales in H1 2019 saw a 3% year-on-year fall due to the closure of some of these stores, and investors may see sales continue to get impacted negatively as more and more stores are shut.
However, this is balanced out by improved performance at Health and Beauty, as well as the Furniture division under IKEA.
The Foolish bottom line
After the share price slump, DFI is trading at a price-earnings (PE) ratio of around 23.5x and has a historical dividend yield of about 3%. Despite the weaker revenue performance, the group still managed to eke out a 5% year-on-year improvement in underlying net profit and has kept its interim dividend constant at 6.5 US cents per share.
The pervasive pessimism surrounding the group is unjustified, I feel, as it had already clearly communicated its multi-year plan.
While it is true that profit margins are at a low point due to the store closures, new hires and expenses to realign the business, I continue to believe that for investors with a long-term investment horizon, DFI presents very good value now.
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 Limited and Sheng Siong Group Ltd. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.