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Dairy Farm Int’l: An Overlooked Contender To A.S. Watson
Corporate Digest | 28 March 2014
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By: Peter Ng
Articles (81) Profile

Many jumped for joy when Li Ka-shing, the man who is responsible for raising two of the largest international conglomerates, Hutchinson Whampoa and Cheung Kong (Holdings), proposed the listing of its retail arm, A.S. Watson (ASW).

Now one can finally own a stake in the international chain of health and beauty retail stores litted with a green sign.

Under its portfolio, ASW primarily operates under the household brands of Watsons and PARKnSHOP, and possesses more than 11,000 retail stores worldwide.

The good news were short-lived as Temasek Holdings agreed to acquire a 24.9 percent stake in ASW for HK$44 billion (approximately $7.2 billion), delaying plans for ASW’s public listing for two or three years without any confirmed timeline.

Fret Not
The good news aren’t entirely over for investors seeking for retail exposure comparable to the likes of ASW. Despite garnering a business model similar in many ways, ASW uses a concentrated approach and mainly focuses on a few powerhouse brands, while Dairy Farm International Holdings who is a formidable contender holds a well-diversified portfolio of retail offerings which encompass several well-known names.

Dairy Farm’s Business
Dairy Farm operates several hypermarts and supermarkets under its portfolio such as Cold Storage (Singapore), Giant (Malaysia), Wellcome (Hong Kong) and Hero (Indonesia).

Little known fact; Dairy Farm also holds master franchise rights, main controller for franchising activities in a specific region, of Ikea, Starbucks via its equity interest in Maxim (Hong Kong) and 7-Eleven.

Dairy Farm provides a direct match to ASW’s portfolio through its health and beauty retail chains of Guardian and Mannings against Watsons as well as Wellcome, which has a comparable number of outlets to PARKnSHOP in Hong Kong.

A glance at Dairy Farm’s historical financials reveals several interesting facts. Revenue more than doubled to US$10.4 billion from US$4 billion and registered growth consistency for the 10-year period between 2004 and 2013, while remaining resilient despite the global financial crisis in 2008.

Revenue growth was not merely a sheer growth in sales volume as the performance of Dairy Farm is paired with a stable gross profit margin of 29 percent derived from a five-year period.

Considering the numerous brands under its portfolio, maintaining such margins represents the managers’ ability to keep its profitability in check which definitely deserves a vote of confidence.

Investment Merits

  • Diversified portfolio of retail concepts spanning from supermarkets, restaurant chains, convenience stores, health and beauty stores as well as home furnishing outlets rivalling ASW.
  • Business model that is resilient to economic slowdowns and still have plenty of room for growth opportunities.
  • Strong balance sheet to fuel future expansion and growth while conservatively financed at a debt to equity ratio of 0.071.

Investment Risks

  • Retail concepts face competition from the growing prominence of E-commerce.
  • Rich valuation compared to ASW.
  • Dairy Farm is traded in US$ and warrants investors to pay attention to currency risk.

SI Research Takeaway
Before snapping up shares in Dairy Farm, an investor ought to compute and understand the current valuation of Dairy Farm. At the closing price of US$9.71 on 27 March, this would value the company at a historical price-earnings ratio of 26.2 times.

A simple computation using ASW as a proxy for Dairy Farm’s valuation, where ASW’s earnings before interest and taxation in 2013 came in at HK$11.8 billion, which indicates that Temasek Holdings has valued ASW at a price-earnings ratio of 21.8 times.

Borrowing the words of Warren Buffet, “Price is what you pay; value is what you get”, overpaying for an investment is certainly not a wise action, however, calibrating your guns and preparing for a dive in price before pulling the trigger could be a viable alternative.

Backed by a strong interest in investments, Peter's research spans across a range of industries, with his focus placed on companies listed on the SGX.

Please click here for more information about this author.

Dairy Farm Int'l Hldgs  5.830 -0.08 -1.35%   
Business: Asian retail co that operates supermarkets, convenience stores & others. [FY18 Turnover] Food (70.3%), health & beauty (14.6%), restaurants (11.8%), home furnishings (3.3%).

Insight: Feb-19, FY18 net profit plunged 77% to US$92m due ... Read More

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