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Is Dairy Farm International Holdings Good Enough to Buy Now?
Corporate Digest | 30 March 2015
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At the Fool, we believe that finding good shares to invest in first starts with figuring out how strong a company’s business is.

And to do so, we can turn to the Rule Maker framework outlined by Motley Fool Chief Executive Officer Tom Gardner in his book Rule Breakers, Rule Makers.

The Rule-Maker Framework

Figuring Out Dairy Farm

With that, let’s run Dairy Farm International Holdings (Dairy Farm) through the framework today.

For some background, Dairy Farm is a pan-Asian retailer which boasts more than 6,100 retail outlets in 12 territories around Asia. You can read more about the company in here & here.

    Here’s how Dairy Farm fares against the Rule Maker framework (numbered in the same order as the seven criteria above):

  • As a retailer, Dairy Farm provides everyday items to thousands of consumers through its stores like Giant and Guardian.
  • From healthcare products to food and beverages, the items sold are often low priced and within reach of the general consumer.
  • The gross margin for Dairy Farm in 2014 came in at 30 percent, higher than its smaller competitor Sheng Siong Group, which had a gross margin of 24 percent for the same period.
  • Dairy Farm clocked in a net profit margin of 4.5 percent in 2014 while Sheng Siong’s net margin in the same year came in at 6.6 percent.
  • Dairy Farm’s top-line has grown by 9.3 percent annually over the past five years. Sales growth had been slower in 2014 though, coming in at 6.3 percent.
  • As of the end of 2014, Dairy Farm had $656.7 million in cash and equivalents, and $93.8 million in long-term borrowings. This gives a cash to debt ratio of 7, which is well above Tom’s desired ratio of 1.5.
  • As of the end of 2014, Dairy Farm had $656.7 million in cash, $1.93 billion in current assets, and $2.57 billion in current liabilities. This gave a good Foolish Flow ratio of 0.49, meaning that Dairy Farm is able to hang onto most of the cash which flows through its coffers. Part of the reason is because Dairy Farm mostly gets paid by consumers at the check-out counters in all its stores, but is able to hold off paying its suppliers until much later.
  • It is hard to judge the level of interest for each individual, but the everyday items that Dairy Farm sells would be familiar and easy to follow for most investors.

Foolish Takeaway

Putting a company through the Rule Maker framework can help you size up the type of opportunity at hand.

With Dairy Farm, we might see a company with a steadily growing revenue base.

The nature of everyday items sold provides stable cash flows but brings with it tight net margins.

Dairy Farm also excels at hanging on to the cash which flows through it, and this is seen by its strong cash to debt ratio.

As a final note, it is important understand that no one company is perfect.

With the characteristics defined above, the onus remains with the Foolish investor to decide if Dairy Farm’s current share price provides an appropriate margin of safety and whether it fits into his or her portfolio.

The Motley Fool (fool.sg) offers stock market and investing information, offering people suggestions on how to take control of their money and make better financial decisions.

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Sheng Siong Group  1.150 -0.010 -0.86%   
Business: Co is a supermarket chain operator.

Insight: Apr-19, 1Q19 revenue rose 10.1% to $251.4m mainly ... Read More
Dairy Farm Int'l Hldgs  5.880 +0.02 +0.34%   
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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